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Ethical Investing = Hypocracy2

Can you ethically invest in Unethical Companies?

The simple answer is No, but to steal a quote “There is always an easy solution to every human problem – neat, plausible, and wrong.”

To make a Webster’s style definition an Unethical Company is a company that exhibits unethical behavior.  Wow, that was helpful.  Now all we have to know is what is unethical behavior?  The problem is that this is often a very personal question and one that if perused to its logical conclusion often leads to hypocrisy. 

Most people will agree that at a bare minimum to be ethical a company must comply with all applicable laws.  This presents numerous problems particularly for the smaller business in that it is virtually impossible to know “all applicable laws” and in some cases those laws are contradictory or compel unethical behavior.  (note back to the quote at the beginning of the article)

Unethical Behavior

Let’s look at the most obvious of the “Unethical” companies, the tobacco companies.  Who could argue that these companies are ethical?  After they make a product that is bad for peoples’ health what could be more unethical than that?  The problem with this line of argument is that it assumes that people are unsophisticated dolts who cannot stop themselves from buying everything that they see an advertisement for.  Clearly that is other people we are talking about not us. 

Freedom is the ability to make choices that others might feel are foolish.  Let’s look at two industries not generally considered unethical, Skiing and white water rafting.  (These are both activities that the author has participated in multiple times).  Clearly people do not need to strap boards on the bottoms of their feet and go down the snow covered side of a mountain or jump in a rubber raft and try to paddle through a miniature version of Niagara Falls.  People get hurt and even die participating in these activities.  What is more they have little real social value.  (Do not give me that line about getting exercise, it is cheaper and safer to get on that treadmill in the basement).

So clearly the skiing and rafting companies are taking advantage of us poor saps that could be running on our treadmills.  In taking our money they are exposing us to risks that are unnecessary and they know the activities they promote are dangerous.   (All they have to do to verify this is look at their insurance premiums).  How is what they do any different from the tobacco companies? 

Obviously we the participants also know that these activities are dangerous and we choose to participate in them anyway.  However, the same argument can be made for tobacco.  Every third grader knows that smoking is bad for you but many in their later years choose to do it.  Cleary, the companies in these cases have a responsibility to explain the risks of using their products but once they have done so are they really to blame is people choose to consume them anyway?  I do not want to live in a world where they are.  I want the freedom to make my choices even if they are foolish and I am willing to bear the consequences of those choices. 

There are movements in this world that attempt to hold companies responsible for the way that people use their products.  The most obvious is guns, but liability law has extended this principal to ladders, lawn mowers, skateboards, ect.  The more successful these efforts are the less free we become.

The correct way to control these activities is to outlaw them.  If we really do not want people to smoke, or ski, or raft, in a democracy we have the option of making these activities illegal.  As long as we as a society do not choose to outlaw particular products or activities we should not hold as unethical those companies who facilitate the choice to participate in these activities. 

The other activity that companies are routinely criticized for engaging in and widely touted as “unethical” is “sweatshop” like working conditions at either its plants or those of its suppliers.  I think these types of accusations often have union propaganda behind them.  The ultimate test of the conditions at a company facility is can the employee leave at any time without repercussions from the company of the government?  If the answer to this question is yes then clearly the company offers a better opportunity to its employees than their other alternatives.  If an employee is free to go and chooses not to than he or she clearly feels the company offers the best alternative to him or her at this point in time.  You do not make people’s lives better by removing the choices that are open to them.   To judge working conditions in another part of the world by our standards often ignores the reality of the choices that are available to workers in that part of the world. 

To illustrate this consider the following hypothetical example.  A company opens a factory in a third world country full of starvation.  It offers workers lodging (a 10x10 room with single cot, toilet, sink & shower), 3 meals a day, and company uniforms, laundry, and basic medical care.  In exchange it requires 12 hour days 7 days a week.  Clearly these are “sweatshop” conditions, but if people are free to leave at any time and there are replacements lined up at the gate, the company also clearly offers the best opportunity to the people at the gate.  Who can argue that the lives of the workers would be made better by closing such a factory?  (Note this is not often done because the cost of protecting the factory from the local warlord exceeds the benefits of 12 hour days in “sweatshop” conditions). 

In the long run we know that capitalism is more ethical to its workers than socialism because after a period of time in capitalistic countries we have to build fences to keep people out and in socialistic countries they have to build fences to keep people in.  Do not confuse socialism with the mixed economies of Western Europe or capitalism with the mixed economy of modern North America.

Illegal Behavior

Clearly we expect our companies to behave within the law.  The issue here is that our laws are often so ambiguous that a company does not know if it has broken the law until it has been convicted of doing so.  The most well known example of this is Microsoft including Internet explorer with windows.  Anti-trust law is notorious for these types of issues.

It would be futile to spend a lot of paper detailing all of the issues with illegal so I will spend time on one example.  I have an issue with needless pollution of the environment so I try and be ethical about environmental issues even beyond the legal it lead me to find out the following.  Most of us know that florescent light bulbs contain Mercury which is bad for the environment even in small quantities.  I knew that at my company we kept burned out florescent bulbs and returned them to the supplier.  I did not know that it cost us to do so but still would have done it anyway.  So when I had some burned out 4’ florescent bulbs at my house I tried to dispose of them properly.  I checked on line (not much help if you live in a rural area, 6 hrs drive to the nearest disposal location).  I contacted a local electrical supplier who informed me that they take them back but only in full cases at a fee of $35/case.  He also informed me that as an individual I could just break them and throw them in the garbage (completely legal).  It appears that only companies have to recycle these.  Suppose an individual starts a small grocery store in the storefront under his apartment.  How is he to know that the same bulbs that he can discard from his apartment must be recycled from his store?   What rational can we as a society have for only recycling bulbs from a business?  Do bulbs from a home pollute the environment less?   This is just one example that has fostered my belief that it is impossible to run a small business legally in the US.  You are in violation of some rule or regulation you just do not know what it is.  Ignorance of the law is no excuse but let’s get real if the Small Business Administration really wanted to do something useful it would quit handing out low interest loans and grants to the politically connected and offer a free service to all small businesses.  The service would be an audit to tell the owner all of the regulations that he needs to comply with.  That way the businessman could go out of business knowing what rules he was breaking as opposed to waiting for the “got-ya” day when he is presented with the fines ect. for breaking a law he never knew existed.

True Unethical behavior:

So is there anything the author considers unethical for a business.  Yes.

1.        Hiding real information on the safety or effectiveness of a product.  (yes the tobacco companies did this in the past)

2.       Lobbying Government to create rules that unnecessarily punish competitors.  (Usually smaller competitors).  This is really a legal form of bribery of government officials. This is known as regulatory capture and it is a huge problem that no one has ever heard of.

3.       Hiding material information about the safety or other critical working conditions from employees or potential employees.  Deliberately and without an employee’s consent obstructing the departure of an employee. 

4.       Fraud – Directed at anyone (note that 1 & 3 are really a form of Fraud)

You can make the list longer but the additions are usually a form of these three.  The problem with making these illegal is that it is difficult to clearly define them in advance.  Note the use of the words “real” and “material” these types of words are a mine field in any law because they create gray areas.

Conclusion:

Ethics is not easy.  The easy answers are often wrong.  Think about the logical consequences of your position.  Try to do what you think is right.  Try to do that within the bounds of what you think or know is legal.  Be prepared for the times you fail at one or more of these.  Understand that there are times where there is no solution let alone an optimal one.