Ethics and Profits Don’t Always Go Hand in Hand
In a recent survey of senior executives, deans of business schools and membersof Congress, 63% said they believed that “a business enterprise actually strengthens its competitive position by maintaining high ethical standards.” A century ago it was believed that good deeds would be rewarded and evil ones would be punished in the afterlife. In our more secular and impatient age, many people evidently are under the illusion that the market system--perhaps abetted by the Securities and Exchange Commission’s enforcement division--is capable of meting out justice in this life.
The Business Roundtable earlier this year released a report, “Corporate Ethics: A Prime Business Asset,” which says, “In the view of the top executives represented in this study, there is no conflict between ethical practices and acceptable profits. Indeed, the first is a necessary precondition for the second.” Kenneth Blanchard, a co-author of “The One Minute Manager,” writes in a special report on ethics in American business issued by Touche Ross that “successful companies over the long term tend to be ethical companies.” In the same report, former SEC Chairman John Shad assures us, “Ethics pays: It’s smart to be ethical.” Others have suggested that restoring executive integrity is necessary to maintain public trust in the U.S. business system.
Does corporate social responsibility--or its current variant, “business ethics”--invariably pay? It is certainly possible to come up with some cases of virtue rewarded and vice punished. Johnson & Johnson is the most widely cited example of the former. Johnson & Johnson’s management did the “right” thing by removing Tylenol from stores and medicine chests during a poisoning scare. And the company’s customers rewarded it by again buying the product once the scare had passed.
Unfortunately, all stories about corporate social responsibility do not have such happy endings. During the 1960s and ‘70s, Cummins Engine, Levi Strauss, Polaroid, Control Data, Atlantic Richfield and Dayton-Hudson were commonly acknowledged to be firms that exhibited an unusually high degree of social commitment. Yet, over the last decade, each of these companies has experienced serious financial difficulties. With the possible exception of Control Data, the companies’ social commitments did not cause their problems. But neither did they prevent them. Indeed, their experiences suggest that in many cases corporate responsibility, rather than being the cause of increased profitability, may instead be a consequence of it: A more profitable firm is better able to maintain some unprofitable facilities in economically depressed areas and contribute generously to cultural and civic activities.
The relationship between ethics and profits is a rather tenuous one, whether one defines corporate ethics narrowly in terms of obeying the law, or more broadly in terms of management’s acceptance of responsibility for the welfare of the company’s stockholders. Being “ethical” or “responsible” is no more, or less, likely to be rewarded in the marketplace than is investing heavily in research and development or having excellent labor relations. Ethics are certainly not a barrier to financial success, but neither are they a prerequisite to it.
While corporate codes of conduct and a strong corporate culture may improve the economic performance of some companies, it is naive to regard them or any other index of commitment to ethical standards as critical to the success of all companies. In fact, some of the companiesprofiled in the Roundtable’s report will undoubtedly do poorly over the next decade, and other far less responsible firms will do extremely well. Some companies and individuals have suffered financially as a result of breaking the law or being insensitive to community concerns, but consider the enormous profits that are made selling illegal drugs and pornography. And for every insider trader who gets caught, one presumes that there are others who live happily ever after.
If good ethics are good business, then why do so many managers find themselves under financial pressures to cut corners? Moreover, to base the case for ethical conduct on economic self-interest is not only misleading, it trivializes the concept of ethics. Equating unethical conduct with errors in business judgment robs business decision-making of the element of moral choice. It also begs the more important and interesting question: What should managers do when there is a conflict between ethics and profits?
Ethics often pay, but sometimes they can be costly. The Roundtable and Touche Ross reports would be more credible if they cited examples of individuals and companies that did what they thought was right even though they lost money as a result. Have any of the firms in the Roundtable study ever rewarded an executive who cost the company a sale by following his or her conscience? Or refrained from entering a potentially profitable venture on the grounds that it was morally suspect? If not, are not the studies implying that one should be ethical only when it pays?
It is irresponsible to imply that acting responsibly is always costless, and it is unethical to base the case for ethics on economic self-interest. If we want executives to act more ethically, we need to be more honest with them and they need to be more honest with each other. The market has many worthwhile features, but setting an appropriate price on virtueis not among them.
