May, 2010 | Bottom Line Ethics

It’s May, and another semester is over. It’s time to turn my attention to the important things of life, like sports. Unfortunately, my two favorite baseball teams, the Orioles and the Astros, are each firmly ensconced in last place, and likely will be for the duration of the season. The NBA just had its powerball lottery to find out who gets to draft John Wall, the Kentucky point guard who is leaving after one year and may have to race to beat his coach out the door. The winner of the lottery was the Washington Wizards, who used to be the Bullets, before that unfortunate moniker became symbolic of the plight of our nation’s capital. The NBA playoffs drone on to the inevitable Lakers-Celtics final.

But the real attention is being paid to two NFL players, Houston wide receiver Andre Johnson and Tennessee running back Chris Johnson, who want to have their contracts renegotiated. Both are arguably among the best players at their positions, and it is understandable that they are interested in being paid more. They are not actually holding out, since this is the season of voluntary workouts. But these types of posturings often end up with players being late reporting to training camp, and generally violating explicit parts of their contracts. Theoretically, fines result, but often negotiations will end up minimizing or eliminating those fines, perhaps in the context of a restructured contract.

So is it ethical for players to do this? It is legal, as long as they are willing to live with the terms of the contract, or retire, and they do not play for another team. It is certainly self-interested behavior, and it is rational for people to act in their self-interest. It is really the only leverage these athletes have. But is it ethical?

Well, technically, yes—this is what we call ethical egoism. In other words, what is ethical is what is best for me. But in the sense of what most people think of as ethical, the answer is no. Yet these players will have many apologists in the press who will excuse the behavior because NFL players have a short window of opportunity, and their careers can end at any time, and NFL owners will ruthlessly cut them if they are hurt. All of these claims are true. But it is still unethical for NFL players to hold out when they are under contract.

Andre Johnson is burdened by an eight-year, already renegotiated contract under which he received a guaranteed $15 million. I am not mocking the amount that he has received, and my opinion does not depend on the details of the numbers. Assuming it was an arm’s length transaction, whether or not he used an agent, he signed the deal weighing his risk and return. This risk included his potentially short career and the aforementioned heartlessness of management if he is hurt. If he was deliberately misinformed by the Texans, then my opinion would change.

Ethical egoism, of course, does not value the keeping of promises. Ethical egoists will ignore promises unless they believe the cost of violating the promise will exceed the benefits. For a football player, there are at least two costs to consider—the legal costs of violating the promise and the reputation costs of being a proven liar. Any rational person who is negotiating with a known liar will demand a bigger return, which means that future football teams’ negotiations with the player will not yield the player top dollar. But if a football player sees his career as limited to a few years, he calculates the reputation costs as being near zero. He may never get to negotiate another contract. So all he has to calculate is the legal costs, and that’s why he has an attorney. And if he feels no duty to keep promises, then what he does is hold out.

Team management does cost-benefit analyses as well, and their calculations may cause them to choose to renegotiate or, in the case of Denver’s Brandon Marshall, trade the player to get value. I may personally prefer not to negotiate with liars, but they are looking to maximize their self-interest as well. But once you renegotiate one player’s contract, watch out for his teammates to come calling, particularly those the team can least afford to lose. I think those costs are routinely underestimated by NFL teams when they deal with the Johnsons of the world.

Andre Johnson could have insured that he would get full market value by signing one-year contracts, or at least short-term contracts. But he would have had to live with the risk that the full market value for his services in a given year (and forever), likely because of injury, was zero. Professors complain for similar reasons, particularly when people are hired in at higher salaries. We want to receive market value, but the market is determined for those who are willing to leave their universities, not for those who want to stay where they are. You have to be willing to assume the risks that go with moving to a new place, with all its uncertainty, if you want to make top dollar. And, in some cases, you have to be willing to give up tenure. The return is linked to the risk.

What professors want is what Andre Johnson wants—return without risk. It’s great if you can get it, but it takes a fool being on the other side of the transaction. Andre Johnson is not holding out, and he has the right to posture all he wants during voluntary workouts. He is just being selfish. But if he holds out this summer, he is violating a promise, and he is being unethical.

Categories: Athletics

As a freshman accounting major I was required to take two science courses. Since I placed out of chemistry, I was able to choose whatever I wanted for my second course. I chose Astronomy, one of the two smart course choices I made during my undergraduate career. (The other was Sports in American Life.) I loved that Astronomy course. It had just enough physics that I could still follow what the professor meant, but not enough to make it evident that my high school physics teacher was more interested in the girls P.E. coach than in teaching physics. In fact, I enjoyed it so much that I signed up for a second astronomy course simply because I had room for an elective.

The second course bore no resemblance to Astronomy as I had come to know it in the first course. The enticing title of the course, “Black Holes and Stellar Masses,” quickly devolved into the droning of an incredibly boring professor on topics indecipherable to man (or at least to accountants). For some unknown reason, if you look at my undergraduate transcript, the course is listed as “Astronomy Bizarre.” How apropos. What began as a wondrous exploration of the mysteries of deep space became an obsession about how much mass could collapse upon itself.

I used to teach at a university that had a live lion in a habitat on campus. Please note that I said “a lion”, as in only one, meaning that this lion was unhappy most of the time. (The current lion is much happier, because they expanded the habitat and gave him a female companion.) It is interesting and unique to have a lion on campus, the kind of thing that you like to tell friends about who live on less savage campuses (no offense, Reveille). I actually stayed in the President’s Home on campus during one visit before I started teaching there. I awoke at 6 a.m. to a jungle roar.

I did not understand lions, because it was not really my job. But it was possible that this creature that I did not understand could significantly affect my life. I can remember thinking to myself, what exactly is the plan if the lion gets out? If I am going to lunch, and I look up to find myself face-to-face with a lion, what is my next step? There may well be a documented plan, but I guarantee you that no faculty member on that campus knew what it was. And those who did were unlikely to carry it out in the heat of the moment.

This brings me, logically, to the 1000 point intraday drop in the Dow last week. As I write, people are still speculating as to what triggered the selling spree that caused Procter and Gamble to plunge 36% and consulting firm Accenture to temporarily trade at a penny. Watching the market the other day and listening to people describe their emotions and decisions reminded me of a bunch of professors trying to decide what to do now that Leo is out of the cage. The popular term for unexpected events in the market is “Black Swans”, after Nassim Taleb’s book, Black Swan: The Impact of the Highly Improbable, which claims that these devastating “unlikely events are far more likely than most investors believe,” according to Tuesday’s Wall Street Journal. In fact, a hedge fund advised by Taleb made a $7.5 million options bet that the market would fall, and this transaction may have started a string of transactions that caused the Dow’s dramatic drop.

Things eventually turned, with some people taking advantage of the situation and some transactions being unwound after the fact. But this black swan was a “loose lion” moment for many people in the market, something they had not experienced before. The markets have chosen efficiency over accuracy, and with electronic high-frequency trading firms providing the bulk of the trades and much of the market liquidity, rapid adjustments of this sort are likely to happen again. Of course, safeguards will be put into place. Leo’s habitat will be redesigned to make escape much more difficult.

But today people are wondering—can one influential trade linked to a bunch of trading robots cause a market disaster? How do I hedge the risk of this type of event happening? The black swans of today are the black holes of my yesterday, collapsing all mass within reach on top of themselves. And as happy as Leo is on a normal day in his habitat, what do we do if he gets out?

Categories: Business

The oil slick from the Deepwater Horizon oil rig continues to grow to unimaginable dimensions in the Gulf of Mexico, as the giant multinational BP desperately tries to drill a relief well and install giant metal boxes to divert and control the oil flow. It seems almost unfair, as the Wall Street Journal noted Monday, in light of CEO Tony Hayward’s yeoman efforts to change the BP culture after the Texas City refinery explosion. In a way, the situation is a metaphor for the many and varied ethical situations that people and companies encounter.

It remains to be seen whether there is anything involved in Deepwater Horizon beyond the technical failure of equipment. But regardless of how blame is eventually apportioned, BP wants only one thing at this point, literally and figuratively. Whether it is in a valve that is a mile below the surface of the Gulf or in the media and courts, the company is desperately seeking closure.

We have seen this cyclically this spring. Last week it was Goldman Sachs testifying before Congress. It would be hard to say that they were actually testifying to Congress, because neither group seemed to actually connect with what the other one was saying. But it was clear, as it is in virtually all Congressional testimony of this nature, that the only thing Goldman Sachs wanted was to get out of there. Even though it is quite likely that they would win a civil case, and there seems little chance, barring significant revelations, that they would lose a criminal case, I would not be surprised to see a significant financial settlement to provide closure.

Tiger Woods has appeared to put things behind him faster than most, almost through sheer force of personality. But you can be confident that there are personal matters regarding his family for which he is still seeking closure. I am sure he is disappointed to lose the endorsements he has, but there is relief in having sponsors choose one way or another. At least it provides closure.

Of course, closure is not always what it is cracked up to be. Jeff Skilling, Dennis Kozlowski, and Bernie Ebbers all got closure, and sentences exceeding 20 years for their parts in Enron, Tyco, and WorldCom, respectively. Skilling is desperately seeking to undo closure in his case, and the Supreme Court has agreed to review his case on several points, including the failure to be given a change of venue.

For me, May is always a time of closure. There are two groups of students who are important to me, one of which I will never teach again, the other of which I may never see again. It is time to say goodbye, and thanks for changing me. They turn away, tack the sail into the breeze, and go away on adventures far and wide. My moment of influence is done.

I once left a school too early, something I quickly realized after arriving at my new university. It was a place where I taught students as many as six different courses, a place where, at graduation, I handed each one a letter telling them how I had seen them change during my years around them. A plaque still sits on my desk today from the juniors at that school thanking me for touching their lives. A year later I drove back 600 miles to their graduation, seeking closure that remains elusive even today.

And this year my daughter, Katie, leaves home for college. There is so much to say in these last few weeks, so much to appreciate, and remember, and embrace. It is time to come to grips with the fact that my job is largely complete. I want a checklist—did I cover everything? Is she ready? I want closure.

All our kids and grandkids will come home for her graduation, and we will spend five days at the beach in Galveston and celebrate a wonderful young woman, and the joy of being a family that is geographically spread, but with hearts knit together by love.

As I sit and look out at the Gulf and reflect on the blessing it has been to be her father, I will have something in common with BP. Good luck to them. I know a little bit of what it is to need closure.

Categories: Business, Family

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