Good Honest Dollar $$

You know that something has to be going wrong with a business when its own staff advise you to take it to court.

But this is exactly what happened in a situation which involved a former supervisor of mine when the apartment which she and her husband were renting become unsuitable for living due to excess noise arising out of major structural renovations in a lower part of the building

Under Australian law, this gave them the right to break the rental contract prior to the agreed expiration date. The landlord, who acted in good faith throughout the process, agreed to this and instructed the real estate agent accordingly.

But from the perspective of the agent, this would have resulted in the forgoing of the commissions which would otherwise have been earned on the remainder of the contract, and as such, the owner of the agency flatly refused to act on the instructions of his client as he was legally obligated to do.

The individual representative who was responsible for dealing with the premises concerned agreed that the premises was not in a suitable state for habitation and was disgusted by the actions of his boss. He advised my supervisor and her husband to appeal his employer’s actions to the Victorian Civil and Administrative Tribunal, which they did successfully and the contract was subsequently terminated accordingly.

 
Why do these industries attract undesirables?
My supervisor’s case was probably at the fairly extreme end, but it does seem that real estate agents seem to attract a fair volume of complaints with respect to their business practices. The same can be said for used car industry, which also seems to attract its fair share of unscrupulous operators.

So why do these industries in particular appear to attract these types of people?

I think that there are at least three key factors at play:

 
• High value/once off transactions.

By their nature, real estate or used car sales generally involve transactions of a once off nature, and very rarely do operators in these industries derive any form of income from repeat sales to particular individual customers.

Accordingly, these operators have very little incentive to make any form of investment in terms of customer relationships or goodwill.

Combine this with the high value of commissions which participants in these industries make on individual transactions, and it is not difficult to understand the incentive for real estate agents or used car dealers to focus pre-dominantly upon milking every deal for what it’s worth, even if this means cutting corners from the viewpoint of ethical considerations.

 
• Fragmentation of industries.

In general, the structure of industries like real-estate or used car sales tends to be highly fragmented - characterized by a wide range of small operators as opposed to a smaller range of dominant competitors.

Whilst this may be wonderful from the point of view of consumer choice, it also makes the process of distinguishing reputable operators from disreputable ones an extremely difficult task.

In this environment, considerations relating to brand name or reputation become less important, and this reduces the degree to which operators in these industries have an incentive to adopt positive behavior from an ethical viewpoint.

 
• Consumer ignorance.

In the case of used cars, it can be difficult for consumers who are not mechanically inclined to determine whether or not there are any mechanical problems with the vehicle.

In addition, with respect to both used car and real estate sales, the process of determining fair market prices can be difficult, making it difficult for consumers to determine whether or not they are receiving fair value for their money.

This type of situation provides the ideal type of environment in which unscrupulous dealers like to operate.

 
Over to you
Are there any other industries that you think typically attract unscrupulous operators?

Do you know of any ‘horror stories’ which have happened in these industries?

It would be difficult to find any legalized industry which involved more violations of business ethics than the sex industry.

Violence, people trafficking, slavery and exploitation of minors and migrants are just a few of the many appalling practices which have been linked to this particular trade.

But a proposed change to the law in Britain, under which punters who unknowingly purchase sex from sex slaves could be subject to prosecution, is no way to tackle the problem.

 
The propose changes 
According to a recent report in The Economist, the sale and purchase of sex is legal under current British law. However, any punter who knowingly purchases sex from a prostitute who is controlled for someone else’s gain (i.e. a sex slave) in Britain is deemed to have committed rape.

This is more than fair. Rape should cover any form of sex which does not occur on a mutually consensual basis, and a sex slave surely cannot be considered a consensual partner.

Conversely, under the proposed changes, any man who has sexual intercourse with such a woman would become guilty of a criminal offense – regardless of whether or not he knew that she was a sex slave.

The columnist who wrote the above-mentioned report presents a convincing case against the proposed changes, and I fully agree with his viewpoint.

 
Poor behavior, but not illegal
Frankly, the sex trade makes me sick, and under no circumstances should the purchase of sex be condoned in any way.

But however morally objectionable it may be, in Britain, it is a legalized industry. Men who purchase sex have not committed a crime from a legal viewpoint, and should not, under any circumstances, be considered to be criminals.

Poor behavior? Absolutely. Criminal behavior? Not under British law.

 
Ignorance of the law versus ignorance of fact 
Proponents of the changes would argue that ignorance is generally no excuse for criminal behavior. But it is important to make a distinction here between ignorance of the law, and ignorance of the facts.

Ignorance of the law is no excuse for criminal behavior. And rightly so – a person who engages in criminal activity should never be able to use ignorance of the law as an excuse. 

But punters who unknowingly purchase sex from sex slaves are ignorant of the facts, not the law.

Within reason, allowances should be made for ignorance of facts, particularly in cases where such ignorance is considered to be understandable. Indeed, British law makes allowances for ignorance of facts in other sex related circumstances. A man who unknowingly has sex with a minor, for example, is not deemed guilty of rape in cases where the minor concerned lies about her age.

Men who unknowingly buy sex from a sex slave should be treated no differently – guilty of poor moral conduct, not of a criminal offense.

(I would thought that it would be quite possible for a man to unknowingly purchase sex from a sex slave. I can hardly imagine that either the prostitutes concerned or their owners are particularly upfront or forthright in their disclosure of such matters)

 
A better way – criminalize (or legalize) the industry altogether
One likely effect of the proposed change would be to force punters to think twice about purchasing sex altogether - undoubtedly an effect which change proponents are hoping for.

But this could just as easily be achieved by criminalizing the purchase and sale of sex outright. At least this way, punters would be convicted due to outright criminal conduct, not mere ignorance of facts.

The debate over whether the purchase of sex should be legal or otherwise is well beyond the scope of this discussion. There are valid arguments on both sides and I do not wish to deal with these here.

Nevertheless, in countries where the purchase of sex does not constitute a criminal offence, punters who unknowingly purchase sex from sex slaves should not be subject to criminal charges.

Criminalize the sex industry or don’t – one way or the other.

But don’t convict anyone whose only legal crime is (understandable) ignorance of facts.

Despite being convicted last year on charges of embezzlement and raising a slush fund to bribe government officials, Hyundai chairman Chung Moon Ko will not serve any prison time.

Mr. Chung’s initial punishment was a three year suspended sentence. But even that was overturned in August when he, along with approximately 340,000 other South Koreans who had been convicted of criminal offences, received a presidential pardon from South Korean president Lee Myung Bak.

This pardon should not have been granted - at least not for business people.

Under the terms of the pardon, which was granted last month on the day marking freedom from Japanese colonialism, the affected individuals will be cleared of their relevant crimes, and will suffer no further punishment in respect of those crimes.

The majority of the crimes involved relatively minor offences, such as traffic related offences. According to my understanding, the pardon for these people was intended principally as a symbolic gesture of national forgiveness.

I see no problem with this – there is too little forgiveness in the world as it is.

But the pardon also covered 74 influential business people, convicted of serious offences such as fraud, bribery, assault and kidnapping (refer article). Along with Mr. Chung, these people included Kim Seung Youn, a tycoon who boasted about how he and his bodyguards physically assaulted staff at a bar after his son was injured in a scuffle. Also pardoned was Chey Tae-won of SK Group, a telecommunications, oil refining and construction conglomerate, convicted in 2003 of illegal share swaps designed to maintain family control of the group.

 
Flawed economics
According to media reports, the inclusion of these men was not merely a symbolic gesture of forgiveness. Instead, it was bought about by a different, and highly flawed, rationale – economic grounds.

From the viewpoint of the government, these people are leaders and entrepreneurs, and their imprisonment was a hindrance to the economy.

I cannot agree. Aside from being unjust, the idea that those who have been convicted of criminal offenses are needed to stimulate the economy simply defies all forms of logic.

On the contrary, the pardon will have a detrimental effect on Korea’s economy, primarily by reinforcing the country’s poor reputation in terms of corporate governance.

 
Reinforcing poor corporate governance
For many years, South Korea has suffered from a poor reputation in relation to corporate governance, which has inhibited the country’s ability to attract investment.

The Korean economy is dominated by chaebols - large corporate conglomerates who wield a considerable degree of political and economic influence. Although shares of many of these entities are listed on the local stock exchange, they are typically controlled by wealthy and well connected families, the behavior of many of which often reflects a negligible degree of corporate accountability and scant regard for issues such as legal compliance, corporate governance or minority shareholder rights. Cases involving practices such as bribery of government officials or stock manipulation are not uncommon.

Why are these practices so common? One reason is that they get away with it. The government has in the past shown a considerable degree of reluctance to hold key business people to account, fearing that heavy handed action would be detrimental to the economy.

But instead, allowing poor governance practices to go unchecked has in itself had a detrimental economic impact. It has created an environment which is not conducive to attracting investment, causing some foreign companies to think twice about job creating investment projects in Korea. It has also inhibited competition in industries where the chaebol are operative, largely to the detriment of consumers.

Dramatic improvements in corporate governance practices are crucial if Korea is to reach its full economic potential, let alone achieve its stated goal of becoming a financial hub within North East Asia.

But corporate governance will not improve as long as criminal behavior goes unpunished.

Despite being seen by some as a hero in the fight for corporate accountability, lawyer Melvin Weiss received a fair and just punishment.

Mr. Weiss was sentenced on June 2nd to thirty months prison for his involvement in a scheme in which his firm, Milberg LLP, paid kickbacks to plaintiffs in shareholder class action schemes.

Mr. Weiss is widely recognized as the pioneer of the shareholder class action lawsuit. Under such actions, a large number of aggrieved shareholders take legal action against their own company, typically over matters relating to corporate governance or the denial of shareholder rights.

The payment of kickbacks to plaintiffs for involvement in such actions was a clear breach of professional ethics, and the punsishment handed down was well deserved.

But the case raises wider questions about shareholder class actions, and whether such actions are beneficial or harmful to shareholders.

 
Objections to shareholder class actions

Critics of shareholder class actions believe that such actions are beneficial to lawyers but detrimental to shareholders.

Objections to shareholder class actions generally fall into two categories: 

 
• Shareholders are effectively suing themselves.

A class action, as opposed to legal action from individual shareholders, involves a large number of shareholders, or a substantial portion of the shareholder base, taking action against the company in which they own shares.

Given that shareholders own the company they are suing, such actions involve shareholders effectively suing themselves to a large extent – a seemingly pointless exercise.

Meanwhile, the law firms who assist them earn lucrative fees in the process.

 
• Fee hungry law firms may encourage shareholder action over frivolous matters.

Such costly cases represent an unnecessary management distraction. They may also encourage an undue degree of risk aversion, particularly in cases where managers fear that mistakes made as a result of otherwise sensible business risks may lead to litigation.  

 
Benefits of Shareholder Class Actions

However, class actions need not be detrimental to shareholders.

Firstly, in addition to cash payments, shareholders can seek other legal remedies, such as specific actions to improve corporate governance. In such cases, shareholders stand to benefit via improved accountability.

Secondly, in environments where shareholder class actions are not uncommon, the mere prospect of such actions may prompt management to undertake preventative measures to strengthen accountability.

Finally, class actions may represent one of the few legal avenues for minority shareholders to enforce their rights, particularly in cases where companies are controlled by single majority shareholders.  

 
Conclusion

Class actions which are frivolous in nature are detrimental to shareholders as a whole, particularly in cases where settlement involves cash payments only.

Lawyers benefit from such actions, not shareholders.

In order to be truly beneficial to shareholders as a whole, class action settlements must include sensible undertakings to improve corporate governance and accountability.

Shareholders benefit only from greater accountability, not from suing themselves over frivolous matters. 
 

Over to you

What do you think?

Are shareholder class actions beneficial to shareholders?
 
Please feel free to add your opinion by clicking on the comments section above.