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Volume 3 Number 26 September
30, 2005 |
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Businesses and ethics Can companies do the right thing and make money at
the same time? A reader recently sent me a news item about something a large corporation had done in a foreign country in accordance with that country's laws. The reader thought the action was reprehensible and asked the question whether businesses could be both ethical and profitable. He concludes: "This would appear to be up your alley, and would, I'd think, be an excellent topic for you to take on." It's not the first time that someone has asked this question in more or less the same words, so perhaps it's time to address it. I'm purposely not going to discuss the action in question, because I think that whole issue -- and the assumption that the company's action was unethical, or even unusual -- distracts from the central question. Rather than directly answer the reader's question, I'm going to pose two other questions. And then I'll answer all three. My first question is something we can all relate to and, I hope, will set the foundation for the other two. And my second question will be the one I think the reader -- and others -- should have asked in reaction to the company's alleged misdeed. So, please bear with me. My first question is whether we, as individuals, can be happy and be ethical, or whether we can live fulfilling lives and be ethical. I hope the answer to that for most of you, if not all of you, is that we can. And I would assume that this is something the parents among you teach your children. Doing what is right isn't always the easiest thing, but we expect people to do it. Telling a lie is often the most convenient response to a difficult situation, but we expect people to tell the truth. It's difficult for a person in dire financial straits to return found money to its rightful owner, but we expect people to do it. And most of us do act ethically, even when it's not particularly convenient. We do it for several reasons. One is that most of us like to feel good about ourselves. With any luck, our training and education has instilled a moral sense that would lead us to feel bad when we fall short ethically. Many of us try to avoid that. However, self interest can often dull that moral sense or serve to mislead us. In that case, we have the brake of public opinion. We want others to think well of us. So, we behave in ways that will bring that about. However, the primary factor is still our own ethical motivation, because most of us will act ethically -- even when it works to our disadvantage -- at times when we could act undetected. This is why we don't steal from the petty cash box (I hope) when there's no one around. So, having determined that most of us will act ethically, even when it's not necessarily to our tactical or financial advantage, let's extrapolate to business activities -- and the question the reader asked. Let's start by agreeing that we are all "businesses," or at least most of us are. We all sell something to other people -- if only our daily labor -- and usually we're ethical about how we do that. For example, I could make considerably more money than I do by selling drugs to school kids. I don't do that primarily because it's illegal and the penalties are severe. So my decision not to do it is pretty much a business decision. I weight the potential penalty against the potential income and decide it's not a worthwhile risk. But assume I discovered some flaw in the pertinent law. Imagine that the people drafting the law had left out a critical "not," and that the law actually read "people shall sell drugs to school children." I still wouldn't do it, and I wouldn't do it because it would be wrong. While one of my goals -- and an important one -- is to make enough money to live well, it's not my only motivation. I suspect that's the same for most other people as well. We all like to make money, and we'd all like to make as much as possible, but we all have limits. There are things we won't do. We don't do them either because they conflict with other priorities we have or because we think they're wrong. Making money is not our sole motivation. When we run a more formal business, we bring a lot of this motivation with us. For example, if I were to open a donut shop, one of my goals -- and an important one -- would be to make money. But I would also want to treat people fairly, even if treating them unfairly would be more financially advantageous, and I would want to sell a quality product. Not everyone behaves this way. Some people do get into business and let making money become their prime motivation. They do treat people unfairly and they do sell a less-than-quality product. This results in two things. The first is that they become lesser people. They sacrifice their self-respect in order to acquire more money. The second is that they lose the respect of others to the extent that their dealings are known. For those whose moral motivation becomes dulled by the quest for more and more money, we put restraints in place. We require that retailers give an honest weight, that contracts are observed, and that the quality of goods meets certain minimum standards. In other words, where the moral motivation is lacking or dulled we provide that motivation in other forms. But the answer to the reader's question is simple. Yes, it is possible to be ethical and make a profit, although the profit may not be as high as some people, motivated only by money, would like. If you can't make a profit, the problem is probably that you're in the wrong business, not that your acting ethically. The question that the reader was really asking, especially in the context of a major international corporation, is whether it's possible for corporations to both make money and act ethically. And that, dear reader, is a horse of a different color. Despite the fact that a quirk in our laws considers corporations to be "persons," they are not. And not being persons, they do not have the moral motivation that human persons have. To talk about a corporation acting morally is a lot like talking about your dog acting morally. Dogs do what dogs do, and corporations do what corporations do. If something will make money for a corporation, then that is what it will do. If that act is something we consider ethical, we're happy. If not, we're unhappy. But it makes no difference to the corporation -- unless our unhappiness will cost it money. I'm sure that someone will want to tell me that corporations "are made up of people" who can presumably act ethically. It's more precise to say that corporations employ people who presumably can act ethically. However, in reality what each employee must do -- from CEO on down -- is to act in the best interest of the corporation. And that "best interest" is to make as much money as possible for the stockholders. So, while I, as an individual or even as a sole-proprietor entrepreneur, can abstain from selling drugs to school kids (even if legal), as a decision-maker in a corporation, I can't realistically make that same decision if it will adversely affect the financial position of the corporation. I certainly could make the decision in a strictly functional way, but it might signal the end of my career at the corporation if the competitor started eating our lunch. Now, I might be able to bump it up to the corporate level, and let the directors decide not to do it on ethical grounds. However, if the company starts to lose money because it failed to pursue a legally permitted option that would have increased the return to the shareholders, then the directors have failed in their one legal duty, which is to maximize shareholder return. Not only could shareholders hold the directors accountable, so could the market. The market is a cruel taskmaster, and the large institutional fund managers look at one thing -- how much return they're getting on their investment. They don't really care why. If my company's performance begins to plunge, they will dump their stock, and will probably drive down the price, making things even worse for the shareholders. Now, you could make the case that there might be enough people upset over the legal fluke that allows the kiddie-drug trade that our taking part in it might trigger a backlash that would have long-term negative effects that would outweigh the short-term revenue increase. So, the directors might agree with me to stay out of the business. That, however, is not an ethically based decision, but a strategic business decision. But let's go one step further and imagine that we're not talking about selling drugs to school kids down the street, but are considering something that will poison streams in a country far away from here whose name no one can pronounce. Would I still even have a ghost of a chance in trying to talk the directors into being "ethical" and taking a chance of the market slamming our stock price into the sidewalk? The issue, as I've said before, isn't corporations are moral or immoral. They are amoral. They do what makes money for their shareholders. Ethics enters into it only as a tool for making more money. If a corporation can make money doing something ethical, then it will do that. If it can't, it won't. Certainly, any group of managers can take a principled stand and buck that trend, but that's not a sustainable position. If the company continues to fail in returning adequate money to the stockholders, the managers will be replaced, as will the directors -- and the market may decide that the company will no longer exist. Before you fire up your word processor and begin processing words to tell me that I "hate" corporations, that I have some knee-jerk reaction to corporations, or that I think all corporations are bad, please re-read what I said. Corporations are neither good nor bad. They are what they are. They can do good things or they can do bad things. While I don't consider them bad, I consider them dangerous. And the bigger they are and the more powerful they are, the more dangerous I consider them. Having a huge corporation around looking for more money is like having a very large and very hungry bear in your campsite. The bear isn't "bad," but he does pose a threat to you, and he will tear the place up until and unless he gets what he wants. To preclude that we take measures that will limit our exposure to bears, and vice versa, and to protect our food supplies and campsites. With corporations, we've done the opposite. Through our business laws we've done the financial equivalent of giving a bear an appetite stimulant. I'm sure someone will write in to tell me (you don't need to bother now) that corporations have a legal obligation to make as large a return for the stockholders as possible. That's true -- but who gave them that legal obligation? Why, we did, of course. We're the ones who make the laws that govern corporate behavior. So, why not, merely rewrite the laws to include a provision that "directors and officers would still have a duty to make money for shareholders, ... but not at the expense of the environment, human rights, the public safety, the communities in which the corporation operates or the dignity of its employees." You can probably tell from the quotes that I didn't make this up, and you'd be right. The words come from Robert Hinkley, a corporate attorney, who suggests that a small change in business laws could give corporations the motivation they need to balance the appetite for greater and greater profits against their responsibility to their employees and the communities in which they operate. But won't that mean that corporations can't be profitable if they have to get all touchy-feely? This is what I'll hear in the next batch of emails (I know this from past experience), but Hinkley, who has more experience in corporate law than I do, has that covered. "To pave the way for such a change, we must challenge the myth
that making profits and protecting the public interest are mutually exclusive
goals. The same was once said about profits and product quality, before
Japanese manufacturers taught us otherwise. If we force companies to respect
the public interest while they make money, business people will figure out
how to do both." The main argument against this is usually that if Corporation A's directors decide to act ethically and Corporation B's directors don't, then Corporation A will be at a competitive disadvantage. This is why, as Hinkley suggests, it's vital to ensure that all corporations operate under the same rules with appropriate sanctions -- against the managers and directors -- for failure to comply. I could go on, but I think you get the point. In fact, rather than try to make Hinkley's whole argument here, I suggest you read it for yourself: But to get back to the original question. Can businesses be ethical and still survive. I think the answer is that many small businesses already do, and we have ways to deal with those who don't. To the further question of whether corporations can act in a way that we consider ethical and still be profitable, I think the answer is that they can. We just have to make sure that they do. |
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© Copyright 2005 Carlton Vogt |