Doing Business and Doing Good: The Role of Business Ethics

on Tuesday, 18 April 2006. Posted in Issue 52 Mental Illness in Irish Prisons: A Solitary Experience?, 2006

Seamus Murphy, SJ

April 2006

 

Down the ages, some currents of thought have seen business as incapable of being honourable, and barely able to be honest, since honest business will always be at a disadvantage in competition with dishonest business.  On this view, neither business, banking, investment, profit-making, nor entrepreneurial initiative promote the good of individuals or society.  Business ethics is doomed to be at best ineffectual, at worst a sham.

A variant of that view is that business is not so much immoral as amoral.  Like war, business involves competition and struggle aimed at the elimination of competitors, alliances and hostile takeovers, layoffs and \'dumping\' in pursuit of profit. War and business are \'worlds\' whose being is constituted by conflict instead of peace, gain rather than justice.1 Here, following moral rules would lead to defeat, and hence would be irrational.  There can be no place for business ethics.

Justice and Adam Smith
The most important critic of that amoralism is none other than Adam Smith in The Wealth of Nations (1776).  Smith is often thought of as one whose praise of free trade explicitly endorsed unrestricted freedom for the economic agent and whose economic theory had no time for ethics. Only through encouraging selfishness and greed, he allegedly argued, could national wealth be increased.
This is a caricature of Smith\'s views.2 He supported free trade, but he did not praise selfishness nor hold that the benefits of free trade could be attained without a proper legal framework to protect individual rights. As a teacher of moral philosophy, whose earlier books were The Theory of Moral Sentiments (1759) and the unpublished Lectures on Jurisprudence, his free market economics were grounded in ethics and law. 

Smith supports morality because individual businesses and the market economy can\'t  work without morality and the laws to which morality gives rise.  Justice, the protection of personal and property rights, and the rule of law are indispensable to the proper functioning of a modern economy.3 His critique of mercantilism and the economic structures of his day was as much a moral as an economic one. His modern devotees should take on board the underlying moral principles he insisted on as necessary, both for social justice and for long-term business success.4 {mospagebreak}

What Ethics is About

Contrary to popular impression, ethics isn\'t just about rules, a list of \'dos\' and \'don\'ts\' about how to behave.  It is also about goals (what are we trying to do, and why is it worthwhile) and about character (what sort of people do we want business people to be).  To use the traditional ethical terms: it\'s about norms (what is \'right\' to do), values (what is \'good\' to seek), and virtues (the character traits of the excellent or admirable person).  

The good is what we want, i.e. whatever it is we take to be worth having.  It\'s about values and goals, whether individual or communal, rational or irrational, selfish or altruistic. The good in business ethics has to do with meeting human economic needs efficiently and fairly, promoting the economic good of society, and contributing to the general well-being of those directly involved in business. The company\'s vision statement is where its values and goals are usually articulated.

The right has to do with actions, i.e. what one ought to do (commands), may do (permissions), and ought not do (prohibitions) in pursuit of goals (the good).  In business ethics, the right is expressed and promoted in laws, company rules and codes of conduct, and other mechanisms for enforcing law and disciplinary procedures.

It is also reflected in general awareness of the company\'s obligations to shareholders and consumers, and the individual\'s awareness of his or her obligations as an employee or member of the corporation.

Most business ethics writing concerns the right, since it is focused on internal issues arising from the day-to-day running of the business, with what managers and executives ought do, and how ethical dilemmas might be resolved. Unfortunately, this has led many people to think of business ethics only in those terms, with the result that much of its relevance disappears from sight.  We cannot ultimately say how business people (for example, investors, CEOs, middle managers) ought to behave (the \'right\'), except in a larger context of what the purpose of it all is (the \'good\').   No persuasive moral rules can be laid down unless people see what it\'s all in aid of. 

{mospagebreak}Business, Finance, The Market: Instruments for Greater Goods
There are two points to make here.   First, who gets to say what the good of business is? 

It is curious that even educated and experienced multinational CEOs have difficulty in saying what the point of business is, in ways that show it as promoting human well-being.  Recently, the world Managing Director of McKinsey and Co., criticising Corporate Social Responsibility programmmes for being defensive and apologetic about business, wrote:

This defensiveness starts the argument on the wrong foot, certainly as far as business leaders should be concerned. Big business provides huge and critical contributions to modern society. These are insufficiently articulated, acknowledged or understood. Among these are productivity gains, innovation and research, employment, large-scale investments, human-capital development and organisation. All of these are, and will be, essential for future national and global economic welfare.5
He is correct in saying that the contribution of business is insufficiently understood, since his own statement reflects just that.  For apart from employment, the \'huge and critical contributions to modern society\' he refers to - productivity gains, innovation, investment, human-capital development - are internal to business.  They are good, of course;  but specifying them doesn\'t take us beyond business to the wider human and social good.  Nobody would identify happiness with wealth, or human well-being with economic expansion.  Even less could one identify human well-being with investment or productivity gains.  The latter are means to the end of economic well-being, which in turn is a means to general human well-being and happiness.   The comment quoted reflects an inability on the part of business to see beyond itself, so that when asked why it should be supported it is incapable of giving an answer that specifies human welfare and value in non-monetary, non-business terms.

Accordingly, his proposal that the relationship between big business and society be seen as a kind of \'social contract\', analogous to the classic notion of the social contract between the state and the people, should be rejected.  In social contract theory, the role of the state was to promote the well-being and the good of the people.  But business is not capable of doing that, precisely because it often can\'t see beyond itself, and so the idea that it could or should play a role analogous to that of the state should be resisted.6

To put the point in a way that might resonate with business people: it is the customer or consumer, not the CEO, who is best entitled to specify the good that business should serve.

Second, and following from the previous point, a little reflection shows that questions such as: What is the point or purpose of business? Why should we let private enterprise provide the goods? are ultimately not about economics, but about ethics. The good of the market includes a range of goods: material well-being, resources for better education, health-care, shelter, welfare, and general quality of human life. 

An economist could not speak of those goods without using ethical notions. She would be speaking of market preferences, consumer desires, material goods, and efficient service in provision of those goods.  \'Preferences\', \'desires\', and \'goods\' are primarily ethical terms. When related to them, the nouns \'service\' and \'provision\' acquire indirect ethical connotations.7 In principle, consumer preference-satisfaction, efficient service, and quality goods provision are instrumental goods in the service of human well-being.8  

{mospagebreak}The Common Good
In light of the previous section, every business should take its vision-statement seriously.  The vision-statement represents its sense that its continued existence is not an end in itself, and that it is meant to serve the wider human good.  A vision-statement is meant to be broad and general, yet not waffly and vague.  If it generates a complacent sense in the company leadership that \'We\'re fine as we are\' then it is useless.  

Two trends of thinking can block that ethical insight.  First, moral relativism is common in the western world today. That can lead some senior business personnel to think that good and evil, right and wrong, exist only in the eye of the beholder, so that profit alone is all they need worry about.

Second, in a strong pro-business climate, influential people, both inside and outside the business world, start thinking of wider society as though it were a company writ large, so that the logic and values of business are the ones wider society should follow. This means collapsing the notion of the common good into a narrow and shallow notion of the economic good.

An example is when the trustees or managers of a hospital or college adopt an ideology of running it along business lines, with business values overriding other values. It is ominous when educators and health-care specialists start speaking of \'customers\' (instead of \'students\' or \'patients\'), \'product\' (instead of \'education\' or \'health care\'), \'productivity\' and \'added value\' (instead of \'commitment\' and \'vocational dedication\').  Behind lies a utilitarian materialism that thinks the only genuine goods are monetary and material.

No reasonable person would deny that there are appropriate ways to adapt business expertise and insights. The inappropriate ways are marked by the assumption that non-business values ought never weigh against business values or financial considerations. On this distorted view, the world of business, commerce and enterprise is the repository of true wisdom, to which the rest of society should bow. 

Such an imperialist stance always provokes an anti-business backlash eventually.  A wave of business scandals typically produces what is called a \'legitimation crisis\' for capitalism, in which people turn against business and view it with hostility and suspicion.  It would be naïve for business to imagine that the failure of socialism removes business\'s need for social legitimacy.9

Just as scientists must sometimes warn people against exaggerated ideas of what science can achieve, so too business people must not let the parallel exaggeration of treating society as if it were a business go to their heads. Business actually needs wider society not to capitulate to the logic of the market, for that would amount to society saying to business: \'Only you can decide what you exist for\'.10   And business isn\'t able to do that.  Only a society that in some significant degree transcends or is independent of business and the market can value business and business people.

{mospagebreak}Law: The Right
Having said something about values, we now turn to norms.  The most important norms are usually incorporated in civil law.  The most basic element needed in keeping business honest is the rule of law: laws properly made, and impartially enforced. The \'dos\' and \'don\'ts\' of business ethics (i.e. the right) are largely expressed in law (international, national, and local).

When companies develop their own internal codes of conduct, they are often seeking to ensure more effective observance of the law or anticipating future legislation. If they want to avoid the reputation of being unprincipled \'fly-by-night\' enterprises, then they need moral principles and codes of conduct.  While some principles are universal (for example, don\'t overcharge, don\'t exploit your workers), others may vary according to the nature of the business.  Appropriate norms on how to behave cannot be specified except in the context of the company\'s policies and values as expressed (for example) in its vision-statement.

The public authority has a major role to play in keeping business honest. A business can regulate itself, to some extent. But if nothing compels its competitors to apply similar ethical rules, that business may founder. Long before that, the business will be under pressure to behave as its competitors do. In this context, it is the state\'s moral duty to make it possible for businesses to be ethical. Public outrage at unethical business practices can be translated, by means of the democratic process, into appropriate legislation. A series of well-publicised business scandals is usually followed by a spate of new legal regulation - at least in the USA (for example, the Sarbanes-Oxley Act of 2002) whatever about Ireland.11 In recent decades, new legislation protecting workers\' rights, prohibiting businesses from damaging the environment, and generally mandating greater transparency have had a positive effect.
At the same time, the law can be a clumsy instrument.  Sometimes business people complain, not without reason, that the legal regulations are too burdensome.  The democratic state, reflecting public opinion, might well reply: \'The laws are there because you have shown you can\'t be trusted\'.  Many businesspeople will cry that this is unfair.  But I have had students in postgraduate management classes say to me that in their view (and presumably in their future career as managers) ethics is irrelevant and that the only thing that matters is not to be caught.  I reply that this amounts to an admission that they (the students) are not to be trusted and that they will cut corners if they can get away with it.  Such an attitude virtually compels the State to regulate them heavily. 

On that scenario, everybody loses.  Trust matters enormously: trust between businesses, trust between employers and employees, trust between businesses and society.  The curious thing about the student managers is that they don\'t seem to see that.  They are probably quite ethical themselves (since it was actually ethical of them to be honest as to their views!), but they often think that ethics conveys no real knowledge since people often don\'t behave in line with ethical norms.   This reflects a narrowness of education among MBAs and managers: they think that the only serious disciplines are descriptive, so ethics can be dismissed since it is a normative, not a descriptive, discipline.  They forget that law too is a normative discipline, where criminal laws are made or strengthened precisely because people are not behaving as they ought. 

In short, just as businesses cannot work with each other without a context of trust, so society needs to be able to trust business.  Ethics is indispensable, and law is needed to back it up.  Here we come back to Adam Smith\'s point (and Catholic social thought\'s conviction) that the good represented and pursued by industry and trade cannot be realised except in a society governed by the rule of law.  The notion of the rule of law is complex.  Among other things, it includes the idea of the psychological internalisation of the value of law in people\'s minds.
{mospagebreak}Character and Excellence
Compliance with law does not suffice to make one just or ethical.  We need business people to be more than just law-abiding, particularly as they ascend the corporate ladder. The law cannot cover everything, and society (and business itself) needs to have business leaders whose moral compass is sensitive and well-attuned.  If board members, CEOs and managers are not economically prudent and financially responsible, they will be unreliable and the market will punish them.  Similarly, if they are not good people, they will be unreliable as regards acting rightly, particularly in dilemma cases or where cutting ethical corners might yield short-term gain. Adam Smith is uncompromising on that point: no ethics manual, rulebook or code of conduct will remedy character deficiency.   How can we develop good people?

There are several strands to the answer. First, the foundations of ethical character are laid in childhood. One cannot be an ethical anything - tinker, tailor, CEO or product developer - unless one has been raised well by one\'s parents or by other significant adults. Being a good person is specified by the virtues: honesty, temperance, reasonableness, fairness, prudence, perseverance, courage, and respect for others.  If you are not an ethical person before you join Widgets and Gadgets Ltd or Flexible Accounting Inc, it is unlikely that you will become one on the job.

Second, the different moral and religious communities within society must combat the \'de-moralisation\' of society and of their own members, resulting from a relativist notion of pluralism. Found in many quarters, such a notion undermines any claim that there is a common good and inculcates the idea that there are no objective moral truths or at least none that are knowable.  That radically undermines business ethics.

Third, society must support and honour the ethical business person, entrepreneur or financier. As Aristotle said: the brave are found where bravery is honoured.12  If the business world seems to lack clear moral compass, it may be because wider society and its religious and moral communities have failed to develop a picture of the admirable business person, i.e. an account of the virtues appropriate to the investor, manager, employer, or banker. This includes not just the general virtues such as honesty or justice, but also those that are role-specific (for example, prudence for the investor, willingness to take risks for the entrepreneur).

Conclusion

We have looked at the three zones of ethical interest to any business: (1) What are our standards of behaviour (for treating workers, customers, etc)?  Are we compliant with the law as a minimum?  Do we try for best practice as well? (2) Do we have a vision of how we contribute to the common good, and do we take it seriously?  (3) What sort of people are we hiring, and do they become better or worse as a result of working for us? 

Those are ethical questions. The wise business person knows that they are also questions about business success, economic efficiency, and public relations.  Ethics is so tied up with them that no business can do without it.


References:
1. For theological reflection on this theme, see John Milbank (1990) Theology and Social Theory, London: Blackwell.
2 .    See, for example, Patricia H. Werhane (1991) Adam Smith and his Legacy for Modern Capitalism, Oxford: Oxford University Press.
3. For a fascinating account of how absence of legally established property and enterprise rights in developing countries plays a crucial role in keeping them poor, see Hernando de Soto (2000) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, London: Bantam Press, Random House.
4.    On the question of whether capitalism is the right model to adopt, recent Catholic social thought draws a distinction:  "If by \'capitalism\' is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative. But if by \'capitalism\' is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality, and which sees it as [only] a particular aspect of that freedom, then the reply is certainly negative." (John Paul II, Centesimus Annus, 1991, n. 42)  Adam Smith would have agreed.
5.    Ian Davis, "The Biggest Contract", The Economist, 26 May 2005.
6.    On this point, along with Adam Smith, see also a thoughtful piece by Michael Skapinker, "Fair Shares?", Financial Times Magazine, 11 June 2005.
7.    For impressive demonstration of the relationship between ethics and economics, see Daniel M. Hausman and Michael S. McPherson (1993) Economic Analysis and Moral Philosophy, Cambridge:  Cambridge University Press (Cambridge Surveys of Economic Literature).
8.    See Martin Wolf (2004) Why Globalization Works, New Haven, Conn.: Yale University Press.
9.    See Richard C. Warren (1999) "Company Legitimacy in the New Millennium", Business Ethics: A European Review,  8: 214-224. See also "Business Ethics: Doing Well by Doing Good", The Economist,  22 April, 2000; "A Guide to Corporate Scandals", The Economist, 11 July 2002; "Two-faced Capitalism", The Economist, 22 January 2004.
10.    For discussion of this point see Elizabeth Anderson (1993) Value in Ethics and Economics, Cambridge MA: Harvard University Press.
11.    In some cases, indictment alone, without any conviction, can be sufficient to destroy a high-profile business.  See "Over Before it Started", The New York Times, 14 June 2005, an op ed piece by Joseph A. Grundfest, Commissioner of the Securities and Exchange Com-mission from 1985 to 1990, on the fact that the quashing of a conviction against Arthur Andersen for obstruction of justice in the Enron case could not resurrect the accountancy giant.
12.    In Swift\'s Gulliver\'s Travels, Gulliver tells the King of Brobdingnag that European monarchs honour generals and admirals. Shocked to hear that those most successful at killing are held up to be admired, the king replies that the type of man he would honour would be one who could make two blades of grass grow where one grew before, a benefactor to society rather than an accomplished killer.

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Working Notes is a journal published by the Jesuit Centre for Faith and Justice. The journal focuses on social, economic and theological analysis of Irish society. It has been produced since 1987.