Even
granting that business ethics is important, many seem to believe that there is
no point in studying the subject. Ethics is something you feel, not something
you think. Finance, marketing, operations, and even business law lend themselves
to intellectual treatment, but ethics does
not.
The
idea that ethics has no intellectual content is odd indeed, considering that
some of the most famous intellectuals in world history have given it a central
place in their thought (Confucius, Plato, Aristotle, Maimonides, Thomas
Aquinas, etc.). Ethics is in fact a highly developed field that demands close
reasoning. The Western tradition in particular has given rise to sophisticated
deontological, teleological and consequentialist theories of right and wrong.
No
one theory explains everything satisfactorily, but the same is true, after all,
in the natural sciences. Even when they grant that ethics has intellectual
content, people often say that studying the field will not change behavior.
Character is formed in early childhood, not during a
professor’s
lecture. If the suggestion here is that college-level study does not change
behavior, we should shut down the entire business school, not only the ethics
course. Presumably the claim, then, is that studying finance and marketing can
influence one’s conduct, but studying ethics cannot.
This
is again a curious view, since ethics is the one field that deals explicitly
with conduct. Where is the evidence for this view? The early origins of
character do not prevent finance and marketing courses from influencing
behavior. Why cannot ethics courses also have an effect?
Ethics
courses have a number of features that seem likely to influence behavior. They provide
a language and conceptual framework with which one can talk and think about
ethical issues. Their emphasis on case studies helps to make one aware of the
potential consequences of one’s actions.
They
present ethical that theories help define what a valid ethical argument looks like.
They teach one to make distinctions and avoid fallacies that are so common when
people make decisions. They give one an opportunity to think through, at one’s
leisure, complex ethical issues that are likely to arise later, when there is
no time to think. They introduce one to such specialized areas as product
liability, employment, intellectual property, environmental protection, and
cross-cultural management. They give one practice at articulating an ethical position,
which can help resist pressure to compromise.
None
of this convinces one to be good, but it is useful to those who want to be
good. It may also improve business conduct in general. How many of the recent
business scandals would have occurred if subordinates had possessed the skills,
vocabulary and conceptual equipment to raise an ethical issue with their
coworkers?
Ethics
not only should be studied alongside management, but the two fields are closely
related. Business management is all about making the right decisions. Ethics is
all about making the right decisions. So what is the difference between the two?
Management is concerned with how decisions affect the company, while ethics is
concerned about how decisions affect everything.
Management
operates in the specialized context of the firm, while ethics operates in the
general context of the world. Management is therefore part of ethics. A
business manager cannot make the right decisions without understanding
management in particular as well as ethics in general. Business ethics is
management carried out in the real world. This is why business
managers
should study ethics.
Why Should
One Be Ethical?
There
is already something odd about this question. It is like asking, “Why are
bachelors unmarried?” They are unmarried by definition. If they were married,
they would not be bachelors. It is the same with ethics. To say that one should
do something is another way of saying it is ethical. If it is not ethical, then
one should not do it. Perhaps when business people ask why they should be
ethical, they have a different question in mind: what is the motivation for
being good? Is their something in it for them?
It
is perfectly all right to ask if there is a reward for being good, but this has
nothing to do with whether one should be good. It makes no sense to try convince
people that they should be good by pointing to the rewards that may follow. One
should be good because “good” is, by
definition,
that which one should be. As for motivation, good behavior often brings a
reward, but not every time. Think about it. If it were always in one’s interest
to be good, there would be no need for ethics. We could simply act selfishly
and forget about obligation. People invented ethics precisely because it does not
always coincide with self interest.
Doing Well
by Doing Good
Although
ethics is not the same as self interest, business executives often want to be assured
that it is the same. They want to make certain that “one can do well by doing
good,” meaning that one can succeed in business by being ethical.
There
is no denying that one can often do well by doing good. An ethical company is more
likely to build a good reputation, which is more likely to bring financial
rewards over the long term. But good behavior cannot be grounded in tangible
reward alone. People who are interested only in reward will behave ethically
when it suits their purpose, but they will go astray
whenever
the incentives change.
There
is a deeper confusion here, too. To look to ethics for motivation is to misunderstand
what ethics is all about. It is like studying finance to find a reason to make
money. Finance does not teach one to want to be rich. It teaches one how to be
rich, assuming one wants to be rich. So it is with ethics. Ethics teaches one
how to be good, assuming one wants to be good.
It
is important to know that one can normally do well by doing good. Otherwise
ethical people could go into business only with a high risk of failure.
Business ethics, however, addresses the opposite question: how can one do good
by doing well? It begins with the premise that managers want to do something
good with their lives and investigates how to accomplish this through business.
In other words, it treats profit and business success as means to a greater
end: making the world a little better.
The Duty to
Make Money
Granting
that a business person’s ultimate objective is to make the world better, how is
this best achieved? A common view is that it is achieved by making as much
money as possible. The best thing business people can do for society is to be
good business people, which is to say, to maximize the company’s profit. They
should therefore stick to finance, marketing and operations management rather
than waste time with ethics.
Economist
Milton Friedman articulates this view in an essay that is quite popular with business
students, “The Social Responsibility of Business Is to Increase its Profits.”1
According to Friedman, corporate officers have no obligation to support such
social causes as hiring the hard-core unemployed to reduce poverty, or reducing
pollution beyond that mandated by law.
Their
sole task is to maximize profit for the company, subject to the limits of law
and “rules of the game” that ensure “open and free competition without
deception or fraud.” Friedman advances two main arguments for this position. First,
corporate executives and directors are not qualified to do anything other than
maximize profit. Business people are expert at making money, not at making
social policy. They lack the perspective and training to address complex social
problems, which should be left to governments and social service agencies.
Second,
and more fundamentally, corporate officers have no right to do anything other than
maximize profit. If they invest company funds to train the chronically
unemployed or reduce emissions below legal limits, they in effect levy a “tax”
on the company’s owners, employees and customers in order to accomplish a
social purpose. But they have no right to spend other people’s money on social
welfare projects. At best, only elected representatives of the people have such
authority. Sole proprietors can spend the company’s money any way they want,
since it is their money, but fiduciaries and hired managers have no such
privilege. If they contribute corporate money to arts or community development,
it must be with an eye to increasing profit, perhaps by attracting better
employees or improving the company’s image. If
they
want to contribute to other social causes, they are free to join civic
organizations and donate as much of their own money as they please.
It
would be nice if the world were so simple. What happens, for example, when laws
permit anti-social behavior? Should businesses not restrain themselves voluntarily,
even if it imposes a cost on company stakeholders? Friedman’s reply is that
they must not, again on the libertarian principles just described. But suppose
a hurricane hits a town and cuts off routes to the outside world.
There
is a desperate need for portable electric generators, and the only local seller
takes the opportunity to charge an exorbitant price. (Something like this
happened when Hurricane Andrew hit
southern Florida.) Since this sort
of price gouging is legal, the store manager has no right, on Friedman’s view,
to “tax” the owners by charging less than the market will bear. He does,
however, have a right to ask the buyer to pay more, since the purchase decision
is voluntary in a free market.
This
little example reveals two fallacies of Friedman’s position. One is the idea
that company officers somehow usurp authority when they act ethically at the expense
of owners. To refute this idea, let us agree that it is wrong for an individual
to exploit hurricane victims by demanding a high price. (If we cannot agree on
this, we can change the example.) Friedman admits that it is perfectly all
right for a sole proprietor to sacrifice potential profit in order to be a decent
human being. But suppose the owner has turned the business over to professional
managers. Does ethical obligation to victims suddenly vanish? Is it permissible
for the owner to exploit victims of disaster through agents, when it would be
wrong to do it personally?
Of
course not. The owner cannot escape obligations simply by hiring someone to run
the business. One might as well argue that an organized crime boss can avoid
responsibility for murder by hiring a hit man to do the deed. Agents who act
ethically at company expense therefore do not usurp the authority of owners. On
the contrary, they carry out duties that the owners are bound to observe, whether
they run the business themselves or through agents.
This
is not to say that managers should use company funds to support any cause that strikes
the owners’ fancy, such as the Irish Republican Army or the Sierra Club. The
reason is that the owners have no obligation as business people to support
these causes. They may have such an obligation as human beings, but it is not
part of business ethics. Since owners hire managers specifically to run a
business, they transfer only their business-related obligations, such as the
obligation not to exploit disaster victims by price gouging. Managers must of
course know how to recognize what sorts of obligations are imposed specifically
by business ethics. This is precisely why they should study business ethics as
well as finance, marketing and operations!
The
second major fallacy in Friedman’s position is his misapplication of
libertarian principles. He states that spending the owners’ money in the service
of ethics is coercion and therefore wrong, while operating in a free market to
increase their wealth compromises no one’s freedom and is therefore
permissible. The electric generators provide a clear counterexample.
Although
no one compels hurricane victims to purchase generators, price gouging is
coercive. It forces the victims to choose between paying ridiculous prices and
letting a warehouse full of food spoil. It takes money from them no less surely
than lower prices take money from the owners.
The
point is even sharper when a company decimates a community by moving a plant abroad.
No one forced these people to work for the company in the first place. Yet the
company limits their choices by putting them out of work, particularly the older
ones, more than it limits stockholders’ choices by reducing their dividends. To
limit choices is to reduce freedom.
It
is clear that maximizing profit can “tax” the broader community no less than
ethical choices can “tax” the owners. The business executive has a special obligation
to owners, but it is not grounded in libertarian principles. It is based simply
on the fact that the executive acts on behalf of the owners.
The
inadequacy of Friedman’s philosophy is particularly evident in international business,
where there are fewer legal restrictions. A famous case study describes how the
Nestlé Corporation marketed its
infant formula in parts of Africa by hiring nurses in local clinics to recommend
formula over breast feeding. The nurses convinced mothers that using formula
was sophisticated and Western, while breast feeding was primitive and
third-worldish. Unfortunately clean water was often unavailable to mix with the
powdered formula, and babies often became ill.
The
company continued its marketing efforts despite worldwide protests and relented
only after years of massive consumer boycotts of its products. On Friedman’s
theory, the company’s intransigence was perfectly justified. Its directors had
no right to withdraw a profitable and legal
product,
even though it caused innocent babies to suffer, until boycotts changed the
financial
equation.
Similar
examples abound, such as pollution in
Nigerian oil fields, worker exploitation
in Southeast Asia sweat shops, and bribery
around the world.
There
is clearly an important element of truth in Friedman’s position. Business
people are not only at their best when making a profit, but in doing so they
make an enormous positive contribution.
Although
Friedman says little about this in his essay, businesses provide a vast array
of products and services that make life far better for millions worldwide. They
can accomplish this largely through the expertise of managers who can run an
efficient operation in a competitive environment. The primary ethical duty of
managers is to apply their business skills and keep up the good work. At the
same time, however, they must pay attention to whether their business in fact
has this kind of positive effect. They are not experts in social policy, and it
is often unobvious how far their social obligations extend. But this is one
reason we have business ethics.
The Rules of
the Game
The
task of business ethics, then, is to identify the duties that business people
have as business people. What are these duties? One can begin with the most
basic ones mentioned by Friedman:
the duty to obey the law and the “rules of the game,” which provide for “open
and free competition without deception or fraud.”
Yet
even these basic obligations are disputed. Albert Carr’s very popular essay,
“Is Business Bluffing Ethical?” argues that deception, for example, is a
legitimate part of business. Business, he says, is like a poker game. There are
rules, but within the rules it is permissible to bluff in order to mislead
others. In fact one must do so or lose the game. The ethical rules of everyday
life therefore do not apply to business.
Using
examples from the 1960s era in which he wrote the paper, Carr defends:
·
“food
processors” that use “deceptive packaging of numerous products”;
·
“automobile
companies” that “for years have neglected the safety of car-owning
families,”
as described in Ralph Nader’s famous book Unsafe at Any Speed;
·
“utility
companies” that “elude regulating government bodies to extract unduly
large payments from users of electricity.”
“As
long as they comply with the letter of the law,” he says, “they are within
their rights to
operate
their businesses as they see fit.”
Carr
tells of a sales executive who made a political contribution he did not believe
in, to keep an important client happy. When the executive told his wife about
it, she was disappointed with her husband and insisted he should have stood up
for his principles. The executive explained to her how he must humor clients to
keep his job. She understood the dilemma but concluded that “something is wrong
with business.” Carr analyzes the incident as follows:
This
wife saw the problem in terms of moral obligation as conceived in private life;
her husband
saw
it as a matter of game strategy. As a player in a weak position, he felt that
he could not afford to indulge an ethical sentiment that might have cost his
seat at the [poker] table.
Carr
not only expects the executive to make such choices but cautions him not to
agonize over
them.
“If an executive allows himself to be torn between a decision based on business
considerations and one based on his private ethical code, he exposes himself to
a grave psychological strain.”
Carr,
like Friedman, has a point. Bluffing is expected in many business contexts, no
less than in poker. No one expects negotiators to put all their cards on the
table, or advertisers to tell the whole truth about their product. What the
poker analogy actually tells us, however, is that “deception” is not really
deception when everyone expects it as part of the game. Nobody is deceived when
advertisers say their product is the best on the market; everyone says that. So
Carr does not actually defend deception. Hiding a card up one’s sleeve, on the
other hand, is truly deception because it breaks the rules of poker and no one
is expecting it. Carr agrees that this sort of behavior, which he calls
“malicious deception,” is wrong.
One
problem with Carr’s poker analogy is that he overextends it. In a poker game everyone
knows the rules, but business situations can be very ambiguous. If a food
processor places false labels on packaging, it is highly unclear that consumers
are “in on the game” and expect this sort of thing. If Mom and Dad take the
kids to school in the family car, it is hard to argue that they “expect” the
car to be unsafe, as was the Ford Pinto with its famous exploding gas tank.
Such practices are now illegal precisely because they genuinely deceived
customers, sometimes with deadly results.
The
example of the political contribution, as well as several others in his
article, suggest that Carr is making an even stronger claim. He seems to argue
that the business game justifies a whole range of activities beyond bluffing,
such as perversion of the political process. The difficulty with this argument
is that it proves too much. It implies that executives can do anything they
want if it is part of a business game in which people play by the rules. But
suppose the game is a shakedown racket, and everyone in town understands the
rules: one must pay protection money or get roughed up by company thugs. This
does not make it all right to participate in the
racket,
even if it is legal, which it is not. In fact, it is illegal precisely because
it is the wrong kind of game to play.
The
unavoidable fact is that some business games are good and some are bad. The
right kind of competition, for example, can allow everyone to come out ahead,
while the wrong kind can be destructive. When one plays the wrong game, then indeed
“something is wrong with business.” How does one know which game to play? There
is a field that deals with this issue, and it is called ethics.
Carr
compounds his error when he advises executives not to agonize over business decisions.
He is right to say that they must not let personal sentiment cloud their
judgment, particularly when it comes to such unpleasant duties as laying off
employees or shutting down a plant. They certainly should not be paralyzed by
indecision and doubt. But they must nonetheless struggle with the alternatives.
Hard decisions are part of life. Sometimes the game of business requires one to
compromise oneself in order to make a larger contribution. Perhaps the sales
executive can promote an exciting new product only by putting up with little
indignities like kowtowing to his clients. But he should never compromise his
values without soul searching, which is to say, without carefully reviewing the
ethical situation. Carr’s assertion to the contrary is profoundly unwise.
