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Tuesday, Feb 05, 2002

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Corporates: On the fine line of ethics

Pratap Ravindran

THE outgoing chief of the Securities and Exchange Board (SEBI), Mr D. R. Mehta, in the swan-song interviews he has been giving the media in the last few months, has sought to explain his lack of success in regulating the capital market satisfactorily by citing inadequacies in law, among other reasons. He may be right — although evidence suggests that he did not make use of the resources available to him under the existing law to ensure a transparent and equitable market.

Incidents in other countries — the collapse of Long Term Capital Management; the bursting of the dotcom bubble which affected millions of small investors even as `insiders', including venture capitalists and investment companies, laughed all the way to the bank; the implosion of Enron Corporation, and so on — all combine to establish that the law, which is after all an evolving and far from perfect body, cannot be relied upon in isolation to ensure that corporates and various related institutions behave themselves.

In fact, it could even be argued plausibly that the law has enabled them to act in a manner inimical to public good. After all, it is the law that recognises a corporate as a person with the attendant rights and which, by recognising the notion of limited liability, promoted a certain indifference among stockholders to the social responsibilities normally associated with ownership.

Many among those who are not convinced that the joint stock firm (the current avatar of an institution which evolved historically to reduce transactions costs) is a many-splendoured thing have long been arguing that if a corporate is recognised as a person under law, then it can reasonably be expected to act ethically in the same manner expected of a human being. They have a point.

After all, society makes a clear distinction between persons who do not violate the law and the principles of ethics and those who, while acting within the confines of the law, do so without reference to what is ethically sound. For instance, Enron Corporation acted well within the law of the land when it concealed its debts in off-the-balance-sheet entities. But, and here we do not have to go farther than common sense, it did act unethically.

And then again, the law does not require stockholders, protected by limited liability, to accept in entirety the consequences of the corporate they own. The corporate can do pretty much what it wants — and the liability of the stockholders is limited by the extent of their investment. You do not have to be a rocket scientist to figure out that this just does not make sense. You are either the owner of a company, and you behave like one, or you are not.

Mr Russell Mokhiber, Editor of the Washington, DC-based Corporate Crime Reporter, and Mr Robert Weissman, Editor of Multinational Monitor, in a paper titled `Corporations Behaving Badly: The Ten Worst Corporations of 2001', have compiled instances of corporate shenanigans not necessarily involving law-breaking but most certainly ethics-bending.

They cite the case of Abbott and write: "Earlier this year (2001), TAP Pharmaceutical Products Inc, a major US pharmaceutical manufacturer, was forced to pay $875 million to resolve criminal charges and civil liabilities in connection with its fraudulent drug pricing and marketing conduct with regard to Lupron, a drug sold by TAP primarily for the treatment of advanced prostate cancer in men."

TAP is a joint venture started by Abbott Laboratories and Takeda Pharmaceuticals of Japan to market two drugs, one of them Lupron. TAP is headquartered in Chicago. TAP's wrong-doings were brought to the attention of federal prosecutors in the US by its former Vice-President of Sales, Mr Dounglas Durand. Mr Durand filed a False Claims Act against TAP in May 1996.

Under the US Federal False Claims Act, whistleblowers who file qui tam lawsuits against companies defrauding the government are entitled to 15-25 per cent of whatever funds the government recovers in cases in which the government joins the lawsuit. In the lawsuit under discussion, the government did intervene and Mr Durand was awarded $77 million as his part of the recovery.

Another whistleblower, Dr Joseph Gerstein, a urologist at the Tufts Associated Health Maintenance Organisation in Boston, joined the fray and said he was offered an "unrestricted educational grant" if he changed Tuft's decision to provide patients with cheaper alternatives to TAP's product. According to Dr Gerstein, he was told that he would not have to account for the $25,000 grant if he got Tuft's to use Lupron as the treatment of choice for prostrate cancer.

TAP responded to the situation with chutzpah. Its President, Mr Thomas Watkins, at the time of settlement, went on record with the statement: "We fundamentally disagree with many of the government's allegations, but we resolved this matter to make clear our commitment to proper and ethical business practices and to avoid protracted legal battles and ensure the uninterrupted availability of Lupron for many thousands of patients who rely on it..."

He added that TAP believed that it had "consistently complied with pricing laws and regulations".

Meanwhile, even as the TAP case was being resolved in Boston, the Chicago Tribune reported that federal prosecutors were investigating whether a division of Abbott Laboratories and at least three other companies had worked with medical care providers to bilk government health insurance programmes for the poor and the elderly. According to the newspaper report, the investigators were trying to find out whether the medical product manufactures had implemented a kickback scheme to encourage hospitals, nursing homes and home care providers to buy pumps used to feed the ill.

Abbott was not too forthcoming about the exact nature of the deals under investigation but it did say: "We are aware of the investigation, and the investigation is inclusive of the whole industry, which includes manufacturers, distributors and providers". Or, shorn of corporate-speak: "Hey! Why are you picking on us? We are all in this together..."Now we get into very iffy territory... There are many who believe that the term `business ethics' is an oxymoron. They argue that no single, universal set of ethical principles exists and that a corporate has fulfilled its responsibilities as long as it has not broken any laws. If people do not like what a company is doing, let them get their government to legislate against it. The more extreme proponents of the to-hell-with-ethics point of view agree with Milton Friedman who, some three decades ago, said that "there is one and only one social responsibility of business — to use its resources in activities designed to increase its profits."

This may sound good to the movers and shakers of this world — but not to the moved and the shaken. Ironically, history suggests that the profit motive may well turn out to be the primary force that compels corporates to develop sensitivity to ethical issues in business. The first attempt to factor ethics into business was made by the highly corrupt US defence industry in the mid-1980s. In fact, the first corporate-ethics office was set up in 1985 by General Dynamics, which was then under government investigation for pricing scams. In 1991, judges in the US were authorised to reduce fines in cases involving companies that had adopted rules to promote ethical behaviour and to increase fines levied on companies that did not have such rules in place.

Inasmuch as the profits of most companies are linked to their reputation, the name-and-shame strategy adopted by NGOs and the media also seems to work. The sight of Milton Friedman willy-nilly locked into a shirasasana is most amusing.

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