Tuesday, September 21, 2010

Suggested ERC white paper

From: RDShatt@aol.com
To: pat@ethics.org
Sent: 9/21/2010 5:10:12 P.M. Central Daylight Time
Subj: ERC white paper muscle flexing

Dear Dr. Harned,

The ERC's March 2010 white paper "Ethical Leadership and Executive Compensation: Rewarding Integrity in the C-Suite" (http://www.ethics.org/files/u5/execComp.pdf) is an exposition of policy and position by the business ethics community that trenches on the turf of management, stockholders, lawmakers and regulators.

This encroachment is justified because of the perceived relevance of corporate compensation to the mission of the business ethics community.

The following sentences from the white paper are indicative of its tone and thrust:
In our view, problems with compensation are symptomatic of the larger challenge of ethics.
If we want to encourage leaders to think of themselves as stewards, ethics and ethical
leadership belong at the heart of the compensation discussion.
* * * *
In hindsight, it is now plain that many compensation plans were flawed by poorly designed
incentives that allowed CEOs to win, but never lose. Particularly in financial service industries,
pay structures often encouraged CEOs to focus on short-term gain without regard to
its sustainability, roll the dice on high-risk strategies in order to trigger incentive pay, and
neglect long-term planning.
* * * *
But absent an ethical culture, even the best designed compensation plan can only do so
much. Barry Schwartz, a professor of psychology at Swarthmore, says the problem with incentives
is that “they get you exactly what you pay for, but it never turns out to be what you
want” because smart people figure out how to manipulate almost any numeric metric.
* * * *
Isn’t it really about ethics when:

Leaders expose their companies and employees to needless risk in order to
meet short-term financial goals?
* * * *
ERC recommends that a corporate board:

Establish an Ethics Committee of the board to monitor its own activity,
to assess the organization’s ethical culture, and to ensure that ethical leadership
is a priority for senior management
Recruit knowledgeable ethics professionals for board seats to provide
other directors with a strong understanding of how to make ethics part of
the organization’s culture

The ERC's white paper is commendably bold in claiming a stake of the business ethics community in the matter of corporate compensation and in vying to have its say about flawed compensation structures contributing to unethical behavior. The ERC's views may or may not coincide with the views of management, stockholders, lawmakers and/or regulatory agencies; the ERC is staking out an independent stand regardless.

I have contended that there is a flawed compensation structure in the operation of the civil liability system, and that this operates to undermine business ethics. See Does the Civil Liability System Undermine Business Ethics? . The civil liability system is a domain in which judges, lawmakers, corporate management, the US Chamber of Commerce, plaintiffs' lawyers, and others have a significant interest and have views . If the system undermines business ethics, the ethics community also has a stake and should have a say.

I hope the ERC's bold intrusion into corporate compensation signifies that it may be prepared to make a similar intrusion into the domain of the civil liability system, its flawed compensation structure, and its adverse effect on business ethics.

I urge the ERC to undertake a white paper on the subject in the same way it has regarding corporate compensation. In such an initiative, the ERC should seek input from the US Chamber of Commerce's Institute for Legal Reform and other specialized resources of information and expertise.

Thank you.

Robert Shattuck

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