Technology and ethics: what should investors consider?

By Robert M. WIlson Jr, Research Analyst, MFS Investment Management

Technology has created enormous value for society and more advancements are coming, as evidenced by the MIT Technology Review’s annual list of breakthrough technologies (2017 and 2018). Although these advancements are beneficial, the rapid pace of development is creating ethical dilemmas for companies trying to monetise these technologies, impacting the users of these technologies and, in many cases, overwhelming the governmental bodies tasked with regulating business activity. As a result, long-term investors need to analyse technology-related ethical issues and participate in thoughtful engagements with companies to effectively model and value these risks.

A wide variety of ethical questions have been raised regarding the impact of technology on individuals and the environment:

Discrimination

Although Facebook has prohibited advertisements targeting demographics like insecure teenagers, it has enabled companies to advertise jobs to specific age ranges, which is viewed by many (including, more recently, the US government) as discrimination. Separately, there are legitimate concerns that artificial intelligence can exacerbate, hide and create unintended biases. This concern is already having a tangible impact today, as a system being used by several US states to help judges with sentencing and parole decisions by assigning defendant risk ratings has “…commonly overestimated the recidivism risk of black defendants, and underestimated that of white defendants.”

Consumer choice

Massive network effects can reduce competition and, in turn, impact consumer choice. Tech companies have exacerbated this concern by employing strategies similar to Microsoft’s in the 1990s, which attempted to use dominance in one area to guarantee it in other areas. There is also a risk that companies with greater resources may be better able to absorb the costs and manage the complexities of complying with increased regulatory requirements (e.g. the GDPR) than their smaller and younger peers—potentially creating an unintended advantage for entrenched players.

Privacy

Amazon’s Echo logs every interaction, Android tracks its users’ physical movements, and Facebook’s Nearby Friends function enables a person to locate people in the physical world. These tools are useful, but they also place increasing amounts of data into the hands of a few tech companies whose future growth depends on identifying and targeting users at a more granular (or intimate) level. In the US, the Orlando Police Department’s test of Amazon’s Rekognition system was quickly shut down, but countries like Russia and China are more willing to employ technology in ways that reduce privacy, which can lead to serious human rights violations. China’s social credit system, which the country is reportedly developing “… to improve governance and market order in a country still beset by rampant fraud and counterfeiting”, has the potential to impact privacy even further.

Mental/physical health and other social impacts

While not the case historically, society now expects tech companies to be responsible for the content their users post, which may include fake news, objectionable videos, and fringe propaganda. However, this responsibility presents a dilemma, as the definition of what is “acceptable” content differs based on geographic location, demographics, and other factors. We should also remember that research suggests that “omitting emotional content” from posts reduces user interaction, so there are real questions regarding how incentivised these companies are to curb extreme content. Finally, whose responsibility is it to manage youth screen time: a parent’s or Tencent and Apple’s? Society and various governments around the world appear to be lurching toward the latter.

General and e-waste

Apple’s admission that its new software slowed down old phones was viewed by some as proof of their long-held conviction that the company forces premature upgrade cycles. Even if planned obsolesce creates jobs and drives innovation, it certainly runs contrary to society’s increasing interest in creating a circular economy.

These ethical issues have, at times, negatively impacted user engagement, employee retention, advertising ROIs, and gaming revenues. They have also generated regulatory fines.

As a result, investors need a framework to identify which companies are better positioned to manage these financially material risks.

A strong framework would include assessments of the following:

Corporate culture

A culture of “don’t be evil” or “do the right thing” seems more likely to lead to employees feeling empowered to voice concerns about their company’s ethical behaviour than a culture that encourages employees to “move fast and break things.” Although this is a simplistic example, culture is likely to be a defining factor in measuring which companies manage these issues well versus poorly.

Questions for management teams could include:

• How do you and your employees balance disruption and innovation against potential ethical issues?
• Does anyone within the day-to-day operations of the business have oversight regarding the potential ethical issues associated with new services/platforms?

Governance

Corporate boards must be involved in the oversight of tech ethics issues. Independent directors who are truly engaged and have the proper skill set may be able to identify ethical issues that insiders do not see.

Questions for independent directors could include:

• How often does the board discuss issues of ethics in the business model?
• Which directors have backgrounds that enable them to better assess potential ethical issues?
• Can you share an example of an ethics-related discussion that occurred at the board level?

Ethics-related disclosures and practices

Transparency can enhance a company’s license to operate and reduce risks related to ethics. For example, Microsoft allows users to manage their data, has strict rules regarding content-based targeting, employs clear procedures regarding government data requests, and lobbies against government efforts to use data inappropriately. Conversely, Facebook’s well publicised mishandling of the Cambridge Analytica scandal, and their considerably looser approach to data privacy policy, illustrate the ethical dilemma that companies face when balancing the opportunity to monetize information with the obligation to protect their users.

Resources to analyse ethics-related disclosures:

• The Ranking Digital Rights index assesses 22 internet, mobile and telecommunications companies on their data privacy policies, and offers detailed company reports that can be used to evaluate companies and their disclosures.

Historical controversies

A company’s track record of proactive versus reactive responsiveness to ethical issues may help investors evaluate their ability to manage future issues. Importantly, individual controversies or regulatory responses should not be analysed in isolation. Instead, investors need to view past controversies, fines and the GDPR as the first signs of a wave of societal and regulatory pushback that will have more substantial impacts on the ROIs of different business segments/models than any one controversy or regulation might have in isolation. Companies that amass controversies in this area and others (e.g. corporate taxation) may be offering investors a signal regarding inadequate internal risk management.

Countries of operation

As noted above, certain countries are more likely to weaponize user data and/or take extreme actions against companies that do not cooperate, which can create risk and opportunity for companies. At times, low levels of human rights in a country can create perverse but positive outcomes for local players, as global companies with high privacy standards may feel uncomfortable offering services in those countries.

Resources to analyse country-level risks:

• Freedom House’s Freedom on the Net ranking offers a detailed analysis of the state of internet privacy in most countries globally.

Business lines

Different technologies and platforms have different societal impacts. For example, social media data may carry higher human rights (and hence ethical) risk than search data. At a more macro level, certain technologies (e.g. automation and AI) could exacerbate income and wealth inequality in developed markets, which could lead to future societal or regulatory backlash, as explained above.

Conclusion

The internet and the technology companies impacted by these ethical issues are unique assets, so we cannot avoid them as investors. However, a robust and thoughtful framework for considering the social risks and opportunities associated with ever-advancing technology, which includes information resources (such as Ranking Digital Rights) and management/board engagement questions, can help investors more effectively model and value these issues.

 

The views expressed in this report are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any MFS investment product.