Blogs & Comment

Post-Hurricane-Irene business ethics roundup

Natural disasters teach us a lot about people, and about business ethics.

Hurricane Irene damage in Manasquan, New Jersey, August 29, 2011 (Photo: Michael Loccisano/Getty)

Natural disasters put all kinds of pressures on the behaviour of otherwise civilized people, and they almost always raise business ethics issues. Here are a few that popped up over the weekend, while Hurricane Irene was wreaking havoc along North America’s east coast.

First, a bit of price gouging:

A trendy Brooklyn hotel generated a flood of cash from Irene, jacking up the price of a room to $999 a night on Saturday as the powerful storm zeroed in on New York, employees said….

As I’ve written before, raising prices during a disaster isn’t always unethical—sometimes higher prices provide an incentive for others to rush to send resources to disaster-stricken areas, and sometimes higher prices give citizens an incentive to avoid overusing scarce resources. I’m pretty sure neither of those rationales applies here.

The flip-side of the price-gouging story is this one: “Generators, batteries big sellers ahead of Irene.” You can learn a lot about the ethics of pricing by contemplating why hardwares stores generally didn’t jack up their prices. (Yeah, there are anti-price-gouging laws in many jurisdictions, but that’s likely not enough to explain why prices stay stable.) Note that this story mentions that “…an Ace Hardware in Nags Head, N.C. … sold out of portable generators.” This almost certainly means some customers went away disappointed. And it’s entirely possible that some of the disappointed needed the generators a lot more than the people who actually got them. Should Ace have found some way of asking customers how badly they needed a generator, or should they have raised the price a bit to make sure that people who bought one really needed one?

Next, from Katy Burne, blogging for the WSJ (just before the storm) in “Hurricane Irene Whips Up Trading In ‘Catastrophe Bonds’“:

Catastrophe bonds, known in the insurance industry as “cat” bonds, are structured securities that allow reinsurers to transfer their own risks to capital-market investors. Investors in cat bonds earn regular payments in exchange for providing coverage on a predetermined range of natural disasters for a set period of time.

Note the similarity here to the controversial practice of short-selling stocks, wherein a trader is betting that the value of a stock is going to go down—that is, betting that the company will do poorly. Many people find that distasteful. Some have even called it unpatriotic. In buying (or in shorting) ‘cat bonds,’ an investor is wagering on human misery. But note that that’s what insurance companies do, too, and none of us wants to be without those.

Next, there have been a few stories about companies helping out by either donating goods or by fundraising for disaster relief (see here and here, for small examples). Many more such stories have no doubt gone unreported. It’s also been noted that some companies are going to benefit from the storm, especially if (like Home Depot) they sell goods that will be needed for reconstruction. Is there anything wrong with that? (See here for a previous blog entry on profiting from disaster relief.)

Finally, the key business-ethics stories to watch, over the next few days, are about insurance claims. Insurance firms are happy that losses look to be lower than expected. But stories will inevitably pop up about consumers having difficulty getting insurers to pay up. This will, again inevitably, be portrayed as heartless. And in some cases it may well be heartless. In other cases, we’ll simply see that people generally fail to understand the economics—and the ethics—of insurance.

Note: The hotel mentioned above has responded to accusations. See the Comments section here.