Ethics, Values and Business Success

Have you ever read the novel or watched the musical called “Les Misérables”?  If yes, you would probably recognize the story of the ex-convict in the novel, Jean Valjean.  He was caught after stealing bread, imprisoned, and later released.  Upon being released from jail, Valjean found that nobody, even inn-keepers, was willing to take in such an ex-convict as himself.  In despair, he decided to knock on Bishop Myriel’s door.  Being a compassionate priest, the Bishop let him in, fed him supper, and gave him a bed for the night.

Guess what happened.  Valjean woke up at the middle of the night, stole the Bishop’s silver plates, and ran.  The police caught him (Valjean is not very good at this, is he?) and brought him back to the Bishop.  The Bishop told the police that the silver plates were not stolen but were gifted to Valjean, and that Valjean actually forgot to take the silver candlesticks as well, while handing his candlesticks to Valjean.

That was how Bill Black, a former CEO of Maritime Life (a big Canadian insurance company with over 2,000 employees before it was acquired by Manulife), started his inspiring speech titled “Ethics, Values and Business Success”.  His question to the audience was, “when do you think the Bishop made his decision to give Valjean the silver candlesticks? Do you think he made that decision when he saw Valjean standing with the policeman carrying the silver plates? Or do you think he made that decision when he saw Valjean in front of his door the first time? Or maybe even before that?”  Black’s point is this:

Personal or corporate values are put to test when a person or a corporation is under stress.

Getting woken up at the middle of the night, the Bishop probably gave Valjean the candlesticks not because (or not only because) he was very quick on his feet, but most likely because he is a kind and forgiving person.  It must have already been a part of who he is for him to respond to the situation that way.  An important question, then, is whether or not our personal/corporate values are firm enough for us to always deal with or react to pressure or unforeseen situations ethically.

Why is it important to have firmly rooted values as a part of who we are?  Black argued that our values affect how we react to difficult situations, which in turn affect our business success.  While there are a few crooks in this world who consciously try to rip others off and get away with it (e.g., Enron), most of us try to do good.  Without firmly rooted values, however, good people may make mistakes when pressed into difficult situations.  Those mistakes may turn out to be very costly (such as the case of Martha Stewart, who is not a fundamentally bad person).  Having deeply rooted values ingrained with our every activity helps us avoid costly mistakes and focus on long-term business success.

Black also raised a few other points in his speech, which I’m not going to go into in order to avoid making this post too long.  However, I want to reflect a little on the relationship of ethics, values and success.  Even though ethics and values often help contribute to long-term business success as Black pointed out, sometimes people seem to get away with unethical decisions without incurring a serious financial loss (or not yet anyways).  We see this time and again with corporations performing unethical business conducts (such as Facebook hiring a PR firm to launch an anti-Google campaign) given a slap on the wrist.  At the same time, the most ethical people or companies are not always the richest ones.  In other words, having firmly rooted values does not always translate into money in your pocket.  Instead, it may translate into trust, credibility, good reputation, good relationship, confidence, happiness of self and others, and ability to sleep at night.  Those things, in my opinion, are the most important things that money can’t buy.

Doing something simply because it is the right thing to do and because it contributes to the happiness of our customers and the society as a whole should have the merit in itself, even though we may not get richer from it.  Having a lot of money is a great thing, but not the most important thing.  Maybe we’re focusing too much on the goal that is not most important.

What is your view?  What are some of the values that you think would help prevent you from making costly mistakes?  What would you have done if you were Bishop Myriel?

Milton Friedman’s NY Times article

Milton Friedman is a very familiar name for every business scholar.  Contributing significantly to the field of economics, he received the Nobel Memorial Price in Economics back in 1976 and was praised by the Economist magazine as the most influential economist of the second half of the 20th century.

As corporate social responsibility (CSR) is concerned, Milton Friedman is famous for arguing that the only social responsibility of a corporation is to maximize profits.  Below is his very-often-quoted passage from his New York Times article dated Sep 13th, 1970:

“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

As a PhD student whose thesis focuses on corporate social responsibility (CSR), I must have seen that quote about 2,179 times in almost every article  that discusses the scope of CSR.  It’s such a strong statement that made me wonder whether the quote was taken out of context. 

Finally, yesterday I had a chance to read the full article, from which the aforementioned passage was quoted.  In the full article, Friedman put up a seemingly convincing argument why a business shouldn’t engage in CSR unless doing so is in shareholders’ benefits.  Friedman argued that businessmen can engage in CSR as long as it’s a sole proprietorship (where the owner has the right to use his/her own money to do whatever he/she wants).  For big corporations (whose shares are held by various shareholders), Friedman argued that managers have agency obligations, i.e. investors (principals) hire managers (agents) to work for them, thus the managers have the responsibility to maximize the principals’ interests.  According to Friedman, the managers can use their own salaries to save the world if they want to, but they shouldn’t engage in CSR under the capacity of their corporations.  Using business’s money for CSR purposes, according to Friedman, can be considered a form of taxing.  If the managers use shareholders’ money for CSR, the managers can be said to be taxing shareholders.  If the managers raise prices of goods/services to raise money for CSR, then the managers are said to be taxing customers.  If the managers reduce employees’ wages so that their companies can spend on CSR, then the managers are said to be taxing their employees, for example.  Friedman went on to explain that normally, a government has check and balance systems where people select their representatives, then different agencies of the government are responsible for different tasks (tax collection, tax planning, tax disbursement, tax auditing, etc.)  If a manager engages in CSR, Friedman argued that it’s like the manager singlehandedly decides to tax other people and then choose how to spend the taxpayers’ money at his/her will.  The manager may be good at managing the business, but not necessarily at managing the world’s economy.  Therefore, according to Friedman, it’s best that all of us just do what we have direct obligations to do, and what we can do best — the manager managing the business to maximize profits to shareholders, and the government managing economic, social and environmental issues.

Friedman made some valid points there.  However, I disagree with some of his arguments for a number of reasons. 

Firstly,  while Friedman believes that companies should make decisions in a way that maximize their profits as long as they stay within the rules of the games, it’s important to point out that big corporations nowadays are so powerful that they can affect the rules of the game.  Through approaches such as lobbying, in many cases, industries have been successful in pushing governments to issue the laws in their favors.  When businesses can both write the rules of the game and play in it, it’s obvious that the businesses would gain and other players in the game (end consumers, the public, animals in the forest, etc) would lose.  How is that fair?  For this reason, I believe that it’s a nice and respectable thing to do if managers consider other players in the game and voluntarily engage in CSR.  Relying on the rules of the game alone to discipline businesses is inefficient because the rules of the game are not necessarily fair for all players, and some players do not have a sufficient voice in affecting the rules of the game.

Secondly, in many cases, it is more cost effective if managers voluntarily decide to spend businesses’ money for CSR programs, e.g. to prevent pollution from happening, than if they were to pollute and let the government cleans up after.  Take the most recent example of BP oil spill.  BP arguably played by the rules of the game by obtaining mineral rights and installing minimum spill prevention measures as required by law.  It can be argued that this disaster happened because of the managers’ profit maximization mentality.  If the managers had been more concerned about the environment, such a disaster would probably never have happened, or at least not in such a big scale like this.  Even though BP was named the responsible party for all cleaning up costs, damage has been done to those poor sea and wildlife animals and can never be reversed.  I believe that we need to see a big picture here, not just businesses and shareholders on one side, and government, society and the environment on the other.  Everybody’s on the same side, living on the same planet.  If the world goes down, everybody goes down.  Without proper CSR, the world appears to be going down faster.

Thirdly, only businessmen have the *power* not only to affect the rules of the game, but also to make some important business decisions that have direct impact to the society and the environment.  Nobody else has the same power.  As eloquently put by Keith Davis in his 1960′s article titled, “Can business afford to ignore social responsibilities?” (and by Spiderman’s uncle), with power comes responsibility. 

Isn’t it fascinating that both Friedman’s article and Davis’s article are still relevant 4-5 decades later?  Or is it sad that the debate around corporate social responsibility appears to have gone nowhere since then?

Panel Discussion: Implications of the financial crisis

The first panel discussion was fun, but I enjoyed the second panel discussion even more! Here are some really interesting points that were discussed during the second panel:

• Ethical expectations of managers are currently lacking.  Most managers appear to have short-term and self-interested focus.  Prof. Len Brooks suggested that in addition to the managers’ focus that need to be shifted, a number of things need to be changed, e.g. business education (to follow UN Global Compact Principles of Responsible Management Education and The Association to Advance Collegiate Schools of Business‘s ethics curriculum) and corporate incentive systems (to incorporate an ethical dimension).
• Research suggested that people have a tendency to underestimate risks when the economy is going well, and overestimate risks when the economy is going badly.  The human tendency of taking too much risk when things were going well, combined with complexity in the market, helped to explain how the economy went wrong. Now that people are overshooting the other way and overestimating risks, Prof. Edward Waitzer pointed out that there’s an opportunity cost in doing that because it provides a disincentive of wealth creation.
• Regulatory frameworks run down over time, as people try to gain or arbitrage from the old, existing system. However, there are challenges in thinking about regulatory reform.  For instance, as most of the immediate damage has been done, there’s a feeling that there’s no rush to re-regulate.  There’s also a mismatch between globalized finance (e.g. international companies) and national governance (e.g. Sarbanes Oxley, which is limited to the U.S.)
• David Conklin suggested that it is more than a duty of loyalty to the corporate and duty of care in managing corporation’s assets. Does interest of corporation mean interests of shareholders or stakeholders?  In the U.S., it’s all about shareholders’ values.  For the rest of the world, it’s about stakeholder interests.  The system has revealed that shareholders’ value alone is too limited.  However, it may be impossible for the Board of Directors to advance ALL stakeholders’ benefits.  Most likely there will be some groups of stakeholders whose interests won’t be advanced.

The panel seems to agree that this is more a people problem than the system problem.  In conclusion, governance can never solve the problem of greed!

Panel Discussion: Financial Meltdown

There’s no better way to start off this blog with the most pressing concern in everybody’s mind at the moment: the financial meltdown.  The Canadian Business Ethics Research Network (CBERN) and Schulich School of Business (SSB) sponsor 2 panel discussions about this.   The first one took place last Tuesday.  For the purpose of this blog, which is about business ethics and sustainability, I’ll only talk about some interesting ethical aspects of the financial meltdown that came up during the first panel discussion:

• Transparency/clarity is an important value in business.  Prof. James Darroch talked about the opaque nature of financial instruments and lack of transparency in Over-the-Counter (OTC) markets as contributing factors to the financial meltdown.
• New phenomena that are generally complicated and difficult for most people to understand need to be critically analyzed beyond short-term financial consequences.  Regarding the recent marketization phenomenon, Prof. Cameron Graham summarized the mechanics of the meltdown as a loop: Banks securitize mortgage –> Banks receive proceeds from sale of securities –> Banks lend to home owners –> back to mortgage securitization.  This system made sense in the past because it benefited multiple parties (banks, ratings agencies, insurance companies, investment brokers, and home owners).  If we had carefully analyzed the system, we would have seen the awaiting subprime mortgage crisis.
• The ethics of incentives deserve more attention.  Prof. John Boatright discussed perverse incentives in the originate-to-distribute model.  The originate-to-distribute model changed incentives for borrowers (who had an incentive to lie about their ability to repay), lenders (who had an incentive to lend to higher risk customers), appraisers and brokers (in the forms of relaxed standards of credit quality and due diligence).  Securitization also changed incentives for lenders, packagers, resellers, rating agencies, and investors in the forms of high fees, high risk-adjusted returns, and increased number of participants.  Who is responsible for perverse incentives?  How should one act when faced with perverse incentives?  To what extent should we rely on incentives?  Does reliance on incentives “crowd out” other factors in responsible behavior?  Can some incentives be “too powerful”?

The second panel discussion, which will be about the implications of the financial crisis, will take place tomorrow.  Hope you’ll be able to attend!

The purpose of this blog

This blog is my attempt at thinking through and crystalizing my thoughts about subjects I am passionate about. I am a PhD Candidate at The Schulich School of Business doing research in sustainability and interested in voluntary social and environmental disclosure, GRI Guidelines, and ethics within the mining industry.

You can learn more about me here.

While I have informally blogged my thoughts on the more general subject of environmental and social issues here, I felt that it is time I setup a forum dedicated to contributing my thoughts and what I am learning as part of my research.

If you would like to reach me, please feel free to leave a comment on one of my blog posts and I am also available at kobboon at kobboon dot com if you would like to contact me outside the context of any of my posts.