The Oxymoron of ‘Business Ethics’ Proves Its Worth

Among financial services firms, those who ranked near the bottom on ethics scoreboards are near the top in the tsunami of financial crisis headlines.
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Among financial services firms, those who ranked near the bottom on ethics scoreboards are near the top in the tsunami of financial crisis headlines.

The business-ethics think tank the Ethisphere Institute has for the last few years been quantifying the ethical spine of corporations, calculating their “ethics quotient” as a measurement of several-dozen criteria like philanthropic giving, enforced codes of ethics and anti-corruption compliance.

Looking back on the financial services research, a pattern emerges.

“We had very poor scores for Wachovia, Merrill Lynch, Morgan Stanley, Citigroup,” said Alex Brigham, executive director of the institute. Also low on the list were Bank of New York, Wells Fargo, Countrywide and UBS. “Then all of a sudden when this meltdown came through, it was like this sinners list. These groups with all the low scores were asking for money.”

The implication seems logical but alarming: that there would be a direct correlation — albeit a negative one — between business ethics and bailout requests, between companies that have tried to do right by their employees, communities, even the environment, and those now asking their communities for billions of dollars of public funds.

“If you look at why these banks are in trouble, it’s because they were doing squirrelly, squirrelly stuff,” Brigham said. “Stuff like that just did not fly in the banks that ran their cultures as an ethical culture.”

Ethisphere’s most recent list of the world’s 100 “Most Ethical Companies,” released last summer, included no American banks. Another study, released last month, concluded companies committed to sustainability have fared significantly better during the economic crisis than their industry averages.

Beyond told-you-so bragging rights, the correlation offers a teachable moment for business ethicists who have been theorizing on the margins of an American business culture dominated by apostles of Milton Friedman.

“There’s a moment now for us to be the generation that makes business better,” said R. Edward Freeman, director of the Olsson Center for Applied Ethics at Virginia’s Darden School of Business. “There’s a moment now to say, ‘Look, if you don’t believe this (only)-shareholder-value-(matters) model is bankruptnow, I don’t know what to tell you. Because, I really would be speechless.’”

Freeman wants to shift the entire conversation of how we talk about business, and what we think of businesses as doing. The first challenge, though, may be engaging the public on a concept many people no longer believe in.

“There’s always been skepticism, the jokes about, ‘Oh you teach ‘business ethics,’ what an oxymoron, like jumbo shrimp,’” said Norman Bowie, the Elmer Anderson Chair in Corporate Responsibility at Minnesota’s Carlson School of Management.

“When I took this chair, it was one joke after another. There’s always been cynicism. What I think has happened now is the cynicism is justified.”

Thou Shalt Do Good
No sooner were those words out of Bowie’s mouth than another scandal broke: Texas-based investment firm the Stanford Financial Group was accused of an $8 billion fraud concealed in offshore accounts in Antigua.

The accusation is based upon the most bare-bones interpretation of business ethics: Don’t commit fraud, don’t lie, don’t cheat, don’t steal.

A broader definition — and the one that has spawned the corporate social responsibility movement — says not only should you not do bad, but you also should do good.

Bowie credits European businesses with first launching this idea of “sustainability,” while their American counterparts have long been influenced by the Friedman philosophy that the purpose of a firm is to maximize profits (businesses in Asia, Bowie said, have been trying to find footing between both models). Business ethics in America have traditionally referred to government compliance — and compliance with laws that spell out the don’ts, not the dos.

Sustainability, on the other hand, captures all of the ideals you won’t find in the Sarbanes-Oxley Act: Invest in your employees at home and the working conditions in your supply chain; support the community that houses you; minimize your environmental impact.

It is not surprising, Bowie said, that that last corporate tenet would be embraced in Europe before it was in the United States. Environmentalism, as a movement, arrived in the mainstream there first, too.

Freeman widely expands a corporation’s obligations beyond just responsibility to its stockholders, but also to all of its “stakeholders,” the parties who may be invested in a company in ways that don’t run through Wall Street. A business’ job, he says, isn’t just to make profit for stockholders, but to provide value for all of its stakeholders — community members, trade unions, the public at large. And the one shouldn’t come at the expense of the other.

“We think the purpose of a business is to make money, that’s all,” said Freeman, who also serves as the academic director of the Business Roundtable Institute for Corporate Ethics. “That’s kind of like saying the purpose of my life is to make red blood cells. I need red blood cells to live, but it doesn’t follow that making them is the purpose of my life.”

When financial services companies ignored their obligation to stakeholders in the community, those people unwittingly became stockholders through public bailouts. There is no better illustration of a company’s tangible obligations to groups outside the annual stockholder meeting.

Some financial services companies not only ignored those groups, but held up their amorality as a culture in and of itself.
“The financial industry, investment banking, stockbrokers — that culture is notoriously greedy, sexist,” Bowie said, referring to Michael Lewis’ Liar’s Poker as an illustration. “If you read the literature that’s come out of that culture, that was a very macho, aggressive, make-money, don’t-give-a-damn-for-anybody-else culture.”

Similar criticisms have been leveled at Detroit’s auto industry, the other main recipient of bailout money.

“I thought that when GM made the Hummer,” Bowie said, “that was a deliberately antisocial act. They marketed it as, ‘We don’t give a damn about the environment; we’re macho.’”

For a time, the Hummer is what many Americans wanted.

“If I think business is a bunch of greedy little bastards out trying to do each other in, I’m going to act like that,” Freeman said. “You have the situation we’re in now in part because we have this flawed idea about what business is, and in part, we’ve enacted it.”

Can’t Afford to Be Good
Brigham wonders what will happen to corporate ethics and responsibility programs now that a recession is in full pitch. Following the example of companies like Bear Stearns and Merrill Lynch, the importance of business ethics seems greater than ever.  But so too, in a recession, is the temptation to cut back on them.

Some corporations, even entire industries, have been conspicuously absent from participation in the Ethics and Compliance Officer Association, which has about 1,200 members.

“It is true that a couple of the major banks currently aren’t members,” Tim Mazur, the organization’s chief operating officer, wrote in an e-mail. “When I ask why, I’m told that the industry is highly regulated and that some banks have too much invested in their regulatory compliance associations to consider opening up to the newer ethics/compliance field.”

He added the association has almost no representation from the securities and investment banking sector.

AIG is a rare bailed-out company that did appear among the handful on the “most ethical” or “most sustainable” lists (although not Ethisphere’s, which Brigham said relies not on publicly available information, but on a deep inquiry into a company’s entire operation). AIG appeared in 2008 among the “Global 100 most sustainable corporations in the world,” a fact AIG trumpeted in its 2007 Corporate Responsibility Report, released last summer.

The latest Global 100, announced in Davos in January at the World Economic Forum, no longer included AIG, a company that has so far consumed $150 billion in government money. AIG’s last social responsibility report, titled Putting our strength behind sustainability, no longer appears on the company’s Web site.  (It was taken down, an AIG spokesman said, “as everything is under review given our critical financial situation.”)

The report’s introduction was ambitious:

AIG is putting our global strength in insurance and financial services behind ensuring the long-term sustainability of our business. In doing so, we are allocating resources to effectively manage the risks and capture the opportunities presented by emerging social, environmental and governance concerns. We believe our sustainability initiatives will help grow our business and produce strong financial results well into the future.

Now, less than a year later, it is hard to see how AIG’s microlending initiative in Third World countries, highlighted in the report, will become a priority amid a fight for the company’s survival. Ethics in the broader definition, though, should not be a luxury for the well-off.

“This is the time that’s showing which companies take it seriously and which ones don’t,” Brigham said.

Revisiting AIG’s report, another trend appears: The company couches its sustainability initiatives as efforts to create, in the long term, shareholder value. The message isn’t do good for good’s sake, but do good because it is, eventually, good business.

“This explains the difference in Europe and America,” Bowie said. “In the U.S., we’ve so focused on the bottom line that you almost have to give that ‘good business’ justification part. Otherwise, you seem naive and stupid, and Wall Street gets unhappy.”

The Ethisphere Institute, for the same reason, makes a point of drawing the good ethics-good business link with its slogan, “Good. Smart. Business. Profit.”

Not a Side Dish, But a Main
Freeman believes ethics and business inherently go hand in hand, and talking about ethics as a separate entity from — and constraint on — business is part of the problem with our current culture.

“This idea that business and ethics don’t mix is kind of the big lie here,” Freeman said. “We need an idea that says business is a human institution, so the normal things we teach children about treating people with respect, dignity, integrity, helping people — that applies as much in business as in life.”

Milton Friedman said the exact opposite. Only people can have responsibilities, he wrote in a famous 1970 New York Times Magazine piece, and as businesses are not people, they have no responsibilities (and anyone who believes otherwise is a socialist).

Friedman revisited this logic in 2005, a year before his death, in a debate with the founder of Whole Foods, a company with both a dedicated philanthropy mission and a high profit margin. Friedman called his philosophical differences with Whole Foods management “for the most part rhetorical.”

“If you could show that helping communities and giving money away, if all that helped increase your profitability, it’s OK,” Bowie said. “The only thing Freidman didn’t like about that was ‘don’t call it ethics, call it business.’”

That would likely be Friedman’s response, were he still alive today, to Wachovia, Merrill Lynch and Morgan Stanley: They didn’t exercise bad ethics, but bad business.

But Freeman insists his difference with Friedman is more than rhetorical (as the Whole Foods founder also argued): Business, he believes, should seek to create stakeholder value and not just stockholder profit — and not because one is a means to the other, but because stakeholder value is the end in and of itself.

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