Rules of the Game, Psychopaths and whistleblowers

The world of business, and the history of business ethics, are made of two parts: Before and after Enron scandal. In the immediate aftermath of the scandal itself, it seemed a critical point in history of finance and economics to economists and financial managers. So much so, that it was described world changing, even more than September 11th by economists like Paul Krugman (2002).

There are many lessons to be learned from this scandal, particularly within the realm of business ethics, but this essay focuses on two of the most important ones: The case of psychopaths as the outcome of the rules of the market game and the case of whistleblowers and their actions.

Games and psychopaths: In game theory, the rules of the games determine its outcome. This also means that the rules of the game also determine players that can stay in the game by winning it. Ironically, sometimes the rules are such, that the most crazy, or the most unimaginative and unperceptive player will win. A very good example will be chicken game (Poundstone, 1993): Imagine two teenagers that drive their cars straight towards each other. Whoever turns the wheel first, will lose. If none of them turns the wheel, they both die (or at least damage their cars severely).

Looking at the game, there is no doubt that if one of the players is insanely proud and wants to win the game no matter the price, without seeing one step ahead (i.e. eventual death), and the other player has at least some common sense, the insane player will win the game. If the game was to be repeated, or if there was a tournament of chicken games, I guess we can all see what would have happened in the finals.

Now, back to the case of Enron, there were two particular game changers (out of the ordinary of corporate businesses) that changed and shaped its seeming success and its impending doom, even before it happens, by determining the players that were allowed to stay in the games the company was playing.

The first rule, which was the prelude to the effects of the second, was simply deregulation. On the one hand, the usage of “Mark to Market” accounting, interestingly with the approval of Arthur Anderson (their accounting firm), and on the other hand there was an external factor of energy deregulation in California (Gibney, 2005). In particular, the fact that Enron’s profits based on mark to market were whatever they wanted them to be, in other words total subjectivity of the profits shown, was to play a key role in the game.

The second, and much more important in creating psychopathic environment in Enron itself, was the program called “Performance Review Committee” or PRC. This was a grading system introduced by Jeffery Skilling, the infamous CEO of the company, based on the notion of “Money is the only thing that motivates people” (Gibney, 2005). The system was a brutal process of elimination based on Skilling’s conception of Darwinian natural selection: Ranking people from one to five (“best” to “worst”), and then firing the ones that had not performed very well (i.e. had not made enough money) and giving huge bonuses to the ones that had.

What is the result of these two main game rules? No regulation boundaries, and then no ethical (or moral) boundaries. Then, the firm started eliminating those who may have had some ethical boundaries of their own based on PRC, which was designed to keep profit seeking people in (remember the example above about the tournament between chicken game players). Thus, the firm kept people that were motivated “solely” by profits: Let’s call them market psychopaths.

Now they had people, traders in particular, that were bound to nothing but making money. And with no regulations on electricity in California, they were prepared to shut down the entire power of a state just to make some profit out of it, and then later even joke about what had happened (Gibney, 2005).

Therefore, the first lesson that we learn from Enron scandal in terms of players themselves, is that the rules of the game matter, because they determine who stays in the game. If the rules of the game are unjust, as we can clearly see in case of Enron, the players will most likely act unjustly and wrongfully. One good reason for the existence of codes of ethics, aside necessary regulations is the exact same thing. They can affect the long run outcome of the games that corporations play, and in a good way.

On the importance of whistleblowers: The case of Enron can teach us something critical about whistle-blowing. Sherron Watkins, the Enron whistleblower, is a great example of how and why an employee should blow the whistle. Although the statement has been doubted (Ackman, 2002), the pattern of Ms. Watkins’s behaviour is significant. Aside from the fact that what she did first, which was writing to Ken Lay (Chairman and CEO of Enron after Jeff Skilling’s resignation), may not be considered whistle blowing at all (Ackman, 2002; Varelius, 2008); the pattern of first going to the management, and then blowing the whistle on the whole thing seems justifiable.

It seems, in each step of the way, first informing Ken Lay (the chairman of the board) and then publicly testifying against what people like Skilling had done (Gibney, 2005) three key elements play an important role. Interestingly, only two of them are immediately visible: Loyalty to the company (Varelius, 2008), and her duty for doing the right thing. She first went to the person that was supposed to be responsible for the fraud issues, but when he didn’t, or couldn’t do anything, she rightfully went to the public.

The third element which may not seem visible on the first look is the loyalty between employees themselves. In case of Enron of course there was none, since Ms. Watkins was sure based on evidence that Andrew Fastow was involved in fraud (Gibney, 2005).

Therefore, each stage of blowing the whistle is to be carefully weighed. Accepting the premise that blowing the whistle can be a moral problem (Varelius, 2008), this action by itself is not, and cannot be a moral problem if both of the previous steps have been followed, meaning that loyalty between colleagues and loyalty between employees and the firm has been broken or does not exist.

 

References:

Ackman, D. 2002. Sherron Watkins Had Whistle, But Blew It. Forbes. [Access online: http://www.forbes.com/2002/02/14/0214watkins.html%5D

Gibney, Alex (Director). 2005. Enron: The Smartest Guys in the Room. 2929 Productions. [Accesss online: http://www.youtube.com/watch?v=_xIO731MAO4%5D

Krugman, P. 2002. The Great Divide. The New York Times. [Access online: http://www.nytimes.com/2002/01/29/opinion/the-great-divide.html%5D

Poundstone, W. 1993. Prisoner’s Dilemma. Anchor. USA.

Varelius, J. 2009. Is Whistle-blowing Compatible with Employee Loyalty?. Journal of Business Ethics. 85:263–275.

The Bankruptcy of Relativism

The idea of relativism, the idea that “The truth of statement X depends on one’s perception” seems very plausible to most people. Ironically, most people think that whoever uses the phrase more is a better intellectual. This may in fact be because of their tendency towards the middle ground fallacy, which states that having the middle ground in different arguments has more credibility.

But whatever the reason, relativism in its naive fundamentalist (“taken to its limits” as Blackburn (2001) puts) form has serious logical and consequential problems. This essay will first focus on these problems, and after rejecting the naive form of relativism, it will be focused on the question “Is there any relevant form relativism?”.

This is just the way we do it here: In other words, cultural relativism. The best way to discuss this is to first give a good description of what cultural relativism is. In book III of Herodotus’ “Histories” (Blackburn, 2001; Harris, Jr, 1997), he mentions an incident that happened during king Darius’s reign in Persia. The Persian empire at the time was the closest to a multi cultural society that we could find, and all the people had their own cultural behaviour and beliefs.

One day, Darius summoned two groups of people, some Greeks who were present for a conference, and an Indian tribe named “Callatiae”. Darius first asked the Greeks how much money would make them eat their own fathers instead of cremating them after they were dead? To which they replied no amount could make them do it. Then Darius turned to Callatiaens and asked how much money would make them cremate their fathers instead of eating them after they were dead (which was their custom)? To which they cried out loudly no amount of money could make them do it.

Herodotus then concludes that “I think Pindar was right to have said in his poem that custom is king of all.” What could be the problem with Herodotus’ conclusion? The simple fact that he does not argue based on any reason, why customs are the ultimate rules and should be obeyed. He does not ask the important question “Why is this the right thing to do?”, or “What are our reasons behind doing this?”.

Another example can easily illustrate this: Stephens (1967) trained some rhesus monkeys to avoid an object, then placed an untrained monkey in the cage. If the new monkey tried to touch the object, the others that were trained not to touch it acted with hostility towards him. After some time, the new monkey started increasingly avoiding the subject. When compared to a control group, these monkeys did not show interest in touching the object, even if they were alone.

If the monkeys were capable of reasoning, and had the free will provided by that, they could have argued if there is any good reason to touch the object or not. Cultural relativism reduces the ethics and values to an authoritative state dictated by the society. This would also mean that we have to consider some things, that we all see easily and intuitively heinous, to be plausible, good or at the very least none-condemnable. Things like child abuse, homophobia or sexism that happen to be very common all over the world, and particularly stirred into the cultures of African or Middle Eastern countries.

This brings us to another side of the relativity argument. Often, the fact that there are controversies in answering the question “What is the right thing to do?”, and that we have never found the way to discover the right thing to do, are regarded as evidence for cultural relativism. But as Harris, Jr (1997) argues, the argument is fallacious: The conclusion simply does not follow. If we don’t know what is the actual right thing to do, and/or even if we have not yet found any way of knowing that, it does not mean that relativism is true. It can only mean that we don’t know what is true.

Everything” depends on one’s perception: This is only taking cultural relativism to the extreme. As Blackburn (2001) puts it, this type of relativism is only subjectivism. Aside from the consequential problem that came above, which in this case goes to the extreme (i.e. now each person can justify any action based on their liking), there is a severe logical problem with being a total subjectivist. If the statement “Everything depends on one’s perception” was to be true, then the truth of that statement itself has to be subjected to one’s perception. And if X says that that statement is false, and Y says that it’s true, then it is both true and false at the same time, which is logically impossible. Moreover, if X says that the statement is false, does that mean that X is right?

Can relativism be relevant?: Like many other things, cultural relativism and subjectivism can in some stances be valid or relevant. But they are only relevant when the truth of a statement is only dependant on what it is relative to. This is an obviously trivial statement, in fact it can logically be considered a tautology. But it may not be so much of a useless statement.

Consider the case put forward by West (2009) about the convergence of corporate governance. As he puts it, there is not a one-way model of corporate governance, but there are many. For instance, what is called the Anglo-American model of governance is more or less based on Utilitarianism, while the European/Japanese corporate governance is closer to deontological morality.

This fact begs answering the following question: “Is convergence to one model justifiable?”. If the answer to this question differs based on the society that the company is working with, and if the success of the company is dependent on it matching with the underlying perception of the society, then it seems that at least from a Utilitarian point of view we have to reject the question. In this case it seems Utilitarianism ironically vote against itself in the societies that have more people with deontological views.

References:

Blackburn, S. 2001. Ethics: A Very Short Introduction. Oxford. US.

Harris, Jr, C. E. 1997. Applying Moral Theories. 3rd ed. Wadsworth. USA. CA.

Stephenson, G. R., Starek, D., Schneider, R., Kuhn, H. J. 1967. Cultural acquisition of a specific learned response among rhesus monkeys. Progress in Primatology. Stuttgart. pp.279-288.

West, A. 2009. Corporate Governance Convergence and Moral Relativism. Corporate Governance: An International Review. 17(1): 107–119