[6.4.] Case Study: Malden Mills.

 

About Malden Mills:

·         Founded in 1906 by Henry Feuerstein; until recently his grandson, Aaron Feuerstein, was the president and owner of the company.

·         Located in Lawrence, MA.

·         Manufactures Polartec^®, a high-tech fabric used in clothing manufactured by J. Crew, REI, L.L. Bean, Land’s End, and others. Sales in the hundreds of millions per year.

·         In December 1995, a devastating fire destroyed three Malden Mills factories, shutting the company down.

·         More than 1000 employees were suddenly without work. Malden Mills was the largest and most important employer in the area. Including taxes and salary paid to employees, it contributed more than $100 million annually to the local economy.

·         Instead of taking the insurance money and retiring, or moving the company overseas where labor is much cheaper, Feuerstein pledged to rebuild. He also continued to pay employees while the factories were rebuilt, as well as maintaining their health insurance.

 

Feuerstein’s choice is surprising, because we think of business people as willing to do just about anything to maximize profit. Because Feuerstein went another direction, he was widely praised, featured in newspaper and magazine articles, interviewed on 60 Minutes, and invited by President Clinton to attend a State of the Union address.

 

Update:

·         In November 2001, Malden Mills filed for chapter 11 bankruptcy protection.

·         In October 2003, the company announced that it had emerged successfully from bankruptcy protection.[1]

·         After the company emerged from bankruptcy, the board of directors was controlled by the company’s creditors, who replaced Feuerstein as CEO and Board chairman.

·         In early December 2004, the company’s workers union voted to authorize a strike. But the strike never happened, as they reached an agreement with the company on a new three-year contract shortly thereafter.

·         In January 2007, Malden Mills announced that they would file for bankruptcy yet again.[2] But soon after, the company’s assets were purchased by Chrysalis Capital Partners and its name was changed to Polartec, LLC.[3]

 

DesJardins suggests that Malden Mills suffered financially because of its emphasis on ethical values. It also seems accurate to say that Aaron Feuerstein suffered for this, since he lost control of the company.

 

 

 

[6.5.] Executive Compensation.

 

A 2000 study cited by DesJardins found that the estimated average CEO pay is 500 times as much as average factory worker pay. So, at that time, on the assumption that the average factory worker made $30K per year, the average CEO was making almost $15 million.

 

According to Forbes magazine, the highest paid CEO in 2007 was Larry Ellison of Oracle, who earned $192.92 million.[4] The next four top earners were:

 

• Frederic Poses of Trane ($127.1 million)
• Aubrey McClendon of Chesapeake Energy ($116.89 million)
• Angelo Mozilo of Countrywide Financial ($102.84 million)[5]
• Howard Schultz of Starbucks ($98.6 million)

 

Another of the highest paid CEOs of 2007 was John Thain of Merrill Lynch, who was paid $83 million that year.[6] Since then, Thain has become the poster-child for unjustified executive compensation.

·         Merrill-Lynch was on the verge of collapse in the second half of 2008 when Thain negotiated the purchase of the company by Bank of America (BOA).

·         As part of the negotiations Thain attempted (but ultimately failed) to secure a $10 million bonus for himself, but he succeeded in securing $4 billion in bonuses for Merrill’s highest ranking executives. The top four executives received $121 million.[7]

·         Because of its acquisition of Merrill, BOA was forced to seek further assistance from the federal government through its Troubled Assets Relief Program (TARP). BOA had already received $25 billion through TARP, but received an addition $20 billion (plus insurance against losses of up to $118 billion) due to its acquisition of Merrill.[8]

·         In early 2008, Thain was preparing to cut jobs and make other adjustments to help avert a financial disaster at Merrill, and he “was preaching the virtues of cost control, telling employees to reduce expenses including car services, entertainment and travel.”[9] But in January 2009 it was reported that during that time Thain himself spent over $1 million of the company’s money renovating his own office:

 

Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.

 

The other big ticket items Thain purchased include: $87,000 for an area rug in Thain’s conference room and another area rug for $44,000; a “mahogany pedestal table” for $25,000; a “19th Century Credenza” in Thain’s office for $68,000; a sofa for $15,000; four pairs of curtains for $28,000; a pair of guest chairs for $87,000; a “George IV Desk” for $18,000; six wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a “Roman Shade” for $11,000; a “custom coffee table” for $16,000; something called a “commode on legs” for $35,000; a “Regency Chairs” for $24,000; “40 yards of fabric for wall panels,” for $5,000 and a “parchment waste can” for $1,400.[10]

 

Also, his personal chauffer was paid $230,000 in 2008; this “included the driver’s $85,000 salary and bonus of $18,000, and another $128,000 in over-time pay.”[11]

·         Thain became an executive with BOA when it acquired Merrill at the beginning of 2009, but he resigned on January 22. About a week later he was subpoenaed by the attorney general of New York to testify about the bonuses paid to Merrill executives just before the BOA acquisition. It is possible that he will face criminal charges.[12] 

 

For many companies, the days of enormous executive compensation packages are on hold. During the first week of February 2009, the Treasury Department announced a cap of $500,000 on executive compensation for any company that takes further federal bail-out money.

 

 

[6.5.1.] Psychological vs. Ethical Egoism.

 

DesJardins points out that if the following theory were true, it would be no surprise that CEOs gladly take home so much money when many of their own employees earn far, far less:

 

psychological egoism (df.): people always act in their own best interest, i.e., people are in fact selfish.

·         This is a psychological theory, a descriptive claim about how people do in fact behave.

·         Another way of stating psychological egoism is to say that no ever actually engages in genuine...

 

 altruism (df.): unselfish behavior motivated only by the desire to help others.

 

What’s more, if this further theory were true, there would be nothing wrong with CEOs accepting so much money while their employees make so much less:

 

ethical egoism (df.): the form of consequentialism according to which the morally right thing to do is always whatever benefits you. (This is a normative ethical theory, a normative claim about how people should behave.)

·         Ethical egoism implies that, whether or not anyone ever does behave altruistically, no one ever should.

·         This theory is, like utilitarianism, and form of consequentialism.

 

Some moral defenses of extreme executive compensation are the following:

·         There is a contractual agreement between executive and company [but this defense leaves open the question whether such an agreement is itself morally permissible].

·         The executive deserves it for hard work and for risks he must take, i.e., it is fair compensation for what the CEO gives to the company. [This is a deontological defense, in that it looks backwards to what the CEO has already done to justify what he is now being paid.]

·         Paying executives a lot has beneficial consequences—higher pay yields harder work, benefiting the company, stockholders, employees, etc. [This is a utilitarian defense, in that it looks ahead to the consequences of high pay to justify paying the CEO so much.]

 

Some moral criticisms of extreme executive compensation are:

·         “[G]reat inequalities of income and wealth are unjust and unfair.” (21, emphases added) [Rawls would object to such high salaries in the case where paying a given CEO so much money does not help to improve the conditions of the worst off people in society.]

·         Such large salaries are “motivated by unseemly greed and ego.” (21, emphases added) [This sounds like an objection from virtue ethics, given that greed and excessive ego are both vices.]

 

 

[6.5.2.] Ethical Relativism.

 

We now return to a meta-ethical theory we considered at the beginning of the semester:

 

ethical relativism (df.): the meta-ethical theory according to which morality depends on the collective moral beliefs of people at a given place and time and can therefore vary from place to place and from time to time; this implies that there is no such thing as objective morality, and thus no such thing as objective moral truth.[13]

 

If ethical relativism is true, then business ethics can only be descriptive—it cannot truly be normative:

·         We can describe what moral beliefs people actually do have, get clearer on what those beliefs mean, and investigate why they have them, i.e., what causes people to have those beliefs.

·         But we can never justify moral beliefs, or show any one moral judgment (e.g., “greed is bad”) to be better or truer than another (e.g., “greed is good”):

 

If relativism is correct, then at best business ethics can help explicate the cultural or social values that underlie our ethical judgments, but it can do little to evaluate them. Philosophical ethics, from the relativist perspective, becomes little more than a process of values clarification in which we can clarify and elucidate our values but not justify them. (23)

 

Consider this argument:

 

1.      It is immoral for a CEO to undermine the well-being of his company by spending large sums of the company’s money on himself.

2.      John Thain did this when he paid $1.22 million to renovate his office.

3.      So, what Thain did was immoral.

 

A relativist might say that while this reasoning is objectively valid (in that, if the premises were true, the conclusion would have to be true too), the first premise is not objectively true but just a matter of opinion. Of course, we might try to convince the relativist that premise one is true by  justifying it with another argument:

 

4.      By accepting a job as a CEO, one creates a moral obligation for himself to act in the best interest of the company that employs him.

5.      A CEO violates this obligation when he undermines the well-being of his company by spending large sums of the company’s money on himself.

6.      Therefore, it is immoral for a CEO to undermine the well-being of his company by spending large sums of the company’s money on himself. [The same as claim (1).]

 

But of course, the relativist could say that (4) is also just a matter of opinion, that it is not objectively true. At this point:

·         We may be at a dead-end as far as convincing the relativist is concerned.

·         But this doesn’t mean that our original claim is no better supported than the relativist’s claim that it is not immoral.

·         And the relativist has had to deny the objective truth of (4), which seems a more fundamental moral claim than (1) and perhaps a claim that is even harder to abandon than (1)/(6).

 

DesJardins makes this same point with the following argument about sexual harassment:

 

1.      It is immoral for an employer to use threats to coerce an employee into submitting to a degrading sexual act.

2.      An employer does this when he commits quid pro quo sexual harassment.

3.      So, quid pro quo sexual harassment is immoral.

 

Again relativist might say that while this reasoning is objectively valid, the first premise is not objectively true but just a matter of opinion. And again, we might try to convince the relativist that premise one is true by giving a further argument in support of it:

 

4.      It is immoral for one person to harm another by damaging her self-respect, integrity and autonomy.

5.      An employer does this when he uses threats to coerce an employee into submitting to a degrading sexual act.

6.      So, it is immoral for an employer to use threats to coerce an employee into submitting to a degrading sexual act. [The same as claim (1).]

 

But again, the relativist could say that (4) is not objectively true. But at this point:

·         We may be at a dead-end as far as convincing the relativist is concerned.

·         But this doesn’t mean that our original claim, that sexual harassment is immoral, is no better supported than the relativist’s claim that it is not immoral.

·         And the relativist has had to bite an awfully big bullet in denying that (4) is objectively true.

 

DesJardins is going to take the following values (among others) as foundational in the arguments he gives in this book (25):

• equality
• fairness
• freedom from coercion
• integrity
• freedom from harm
• honesty

 

He suggests that we avoid these traps that can lead us into relativism:

 

1.      Applying too high a standard to ethics; absolute certainty may be possible in some fields (“[m]athematics and the more theoretical side of physics, engineering, and chemistry”[14]). But, says DesJardins, there are many more perfectly legitimate fields of inquiry in which absolutely conclusive proof is impossible, and ethics is one of them.

 

2.      Taking the fact that there is wide disagreement about ethical values to imply that no agreement is possible, or that all beliefs on a subject are equally good; lots of people believe that the earth is visited by aliens, while others disagree—this does not mean that there is no fact of the matter about whether the earth has been visited by aliens, nor does it mean that people are fated always to disagree about this. The same holds true for moral claims.

 

3.      Assuming that there is wide disagreement about fundamental moral values. Some actions are (almost) universally held to be immoral, e.g., “[c]hild abuse, torture, genocide, and slavery” (26).

 

4.      “[C]onfusing values such as respect, tolerance, and impartiality with relativism.” (26) As DesJardins points out, if you maintain that tolerance for other peoples’ views, including moral differences among cultures, is a good thing, then either

(a) that is just your opinion (in which case tolerance is not really a good thing and the intolerant person isn’t really doing anything wrong); or

(b) it is not just your opinion and tolerance really is good, in which case ethical relativism is false.

 

 

Stopping point for Monday February 16. For next time, finish reading DesJardins ch.2 pp.29-47.