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Ethics as Risk Mitigation

Summary of the Top Risks and Ethical Decisions 2009 workshop

By Devin T. Stewart | January 26, 2009

Imagine it's 1953 and you are an executive of a company that sells a product thought to provide consumers around the world with conviviality, health, and a positive image. One day a report comes across your desk showing that your product, cigarettes, may cause cancer. What do you do? Do you tell the truth, or do you obfuscate, lie, and wait for the truth to come to light? Do you opt for short-term pain or do you push the problem to future generations in the hope that the causes and consequences of your product's side effects will be too diffuse to affix blame?

Art Kleiner, editor of strategy+business, posed this question at a recent Carnegie Council Workshop for Ethics in Business on "Top Risks and Ethical Decisions 2009." Both decisions, lying and telling the truth, carry great risk to your company, but, as Kleiner argues, the ethical one allows the decision-maker to sleep at night. This type of decision matrix could have been applied to executives at the U.S. Securities and Exchange Commission, Lehman Brothers, or American Insurance Group in 2008, with positive consequences for the state of the world in 2009.

The importance of decisions made at the personal level has been on display in recent months. During a television news segment this month a victim of the Bernard L. Madoff Investment Securities scheme said she put all of her savings in the Madoff fund because she knew Mr. Madoff through friends. A financial analyst commenting on the interview said the woman broke two rules for responsible investing: diversify and due diligence. Responsible investing, like ethics, should be understood and applied.

The decisions that were made in the financial sector in 2008 have now created problems that must be addressed by governments in 2009, suggested Eurasia Group head Ian Bremmer at the Carnegie Council panel. Power worldwide is moving from financial capitals to political capitals—from New York City to Washington, D.C., from Dubai to Abu Dhabi, from Shanghai to Beijing—increasing overall political risk.

Bremmer concluded that the top risk for 2009 is the "rise of Congress"—the growing fiscal and regulatory role of the U.S. government in response to the financial crisis. The danger is that new regulations and government investments will be misconstrued abroad as unfair practices or protectionism, sparking a vicious cycle of retaliatory responses further reversing the advance of globalization and opportunity for developing countries.

Bremmer also suggested that the Chinese government may redirect domestic frustration toward the West for the inevitable woes caused by the global economic slowdown. Ironically it was the global economic system that fueled rapid Chinese growth in the first place. It is doubtful, however, that the Chinese people would accept this anti-West propaganda wholesale.

Another factor influencing policy-making in China is the immediate need to provide growth, jobs, and health care. As Bremmer put it, while China has been credited with long-term policy planning over the past decade, the urgency of the financial crisis will shorten the time horizon of Beijing's planning. China may no longer be the most strategic-thinking country. Bremmer believes that distinction may soon go to Saudi Arabia, due to their conservative budgeting and responsible competitiveness.

The clear risk from protectionism and inward-looking policies is what Michele Wucker of the World Policy Institute identified as the undesirable "beggar thy neighbor" approach to foreign policy.

Global problems necessitate global cooperation, not rivalries. Wucker pointed to the example of small island nations in the Caribbean that contribute little to global warming but that suffer the brunt of it from hurricanes and other natural disasters. Rising oceans are generating climate change refugees, which exacerbates the already major risks of migration and ethnic conflict. It also amplifies states' obligations to their citizens and to the world. Yet these countries have little influence in global discussions on the reduction of carbon emissions.

Another area that could cause resentment among poorer countries is the policy response in rich countries to the financial crisis. It is well known that the Washington Consensus preached fiscal austerity to smaller economies when they were faced with crises in order to get their economies in order and attract foreign direct investment. Yet the countercyclical response of the United States in the current crisis will be lower interest rates and enormous government deficits—to stimulate consumption and reenergize the housing market. The hypocrisy will be evident.

When ethical challenges arise, Kleiner said that decision makers can choose to either tell the truth or cover up the problem. The difference is in the timeline of the feedback. But a good decision is one that is "robust" whether the risks occur or not. The question is how to empower people to make good decisions within organizations.

Kleiner asserts that there are three principles that facilitate ethical decision making. The first is consciousness, or awareness of the cumulative effort of our actions. In the case of Toyota Motor, managers are asked to meditatively examine the factory floor to sharpen awareness and identify problems. The second is discipline. An executive who goes over the profit/loss figures regularly will physically reconfigure his or her neurons. Goldman Sachs has been lauded for noticing a discrepancy between its risk models and its profit/loss figures in 2007, which led the company to get rid of mortgage-backed securities. The third is empathy, which implies that all members of an organization participate and have a stake in its future. Kleiner cited Procter and Gamble as a model organization in this regard.

Returning to the story of the woman who put all her money in the Madoff scheme, it is critical to remember that no matter where we work, we all have responsibilities to organize and manage to protect ourselves from future risks, even if they are the unknown black swans, as Nassim Taleb calls them. Political scientist Paul Bracken has offered six ways to organize against risks, which recognize that no one can see the future even with models of the greatest predictive power.

Bracken recommends organizing or preparing for the worst by: isolating assets from risk or uncertainty; turning big problems into more manageable chunks; establishing warning systems; putting in place agile logistical systems; using alliances to spread risk or outsource tasks; and shaping the security environment to increase stability.

Restoring moral leadership is the key to the spread of an enlightened sense of self-interest. President Barack Obama offers the hope of a shared sense of self-interest in the global decision-making framework, but as Wucker notes, change will have to occur in other parts of the world as well, not just in Washington.

Christina Madden contributed to this article.

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Read More: Business, Economy, Ethics, Globalization, Governance, China, Saudi Arabia, United States, Americas, Asia, Global, Middle East

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