Five Core Concepts The Cause Ethical Problems In Organizations

By Murray Johannsen

In business, It's easy to talk about ethics, but its damn hard to be ethical.

Since the year 2000, it has been estimated that 100,000 new MBA's from the top 50 business schools have entered the workforce. Tragically, It's an open question whether these extremely bright young men and women will do more harm or good.

Much will depend on how they interpret certain Core Concepts about public corporations taught them in the business schools. Unfortunately, mindlessly following these ideas will create ethical problems for these graduates and likely harm many in the societies in which they reside.

Background

It's becoming clear that as the 21st century progresses, one of the more powerful players on the world stage will be the multinational corporation. In some cases, the profits of these entities will exceed the GDP of entire nations. If corporations are to wisely use the wealth they generate, management will have to pay more attention to business ethics.

Choosing A Western Ethical Philosophy

Philosophers and prophets across the ages have come up with a number of these ethical principles. In fact, all religions have a system of ethics and ethical standards that often get codified in law. Moses's Ten Commandments is one example, but there are many others.

The enduring example of a system of professional ethics was developed by the Greek physician Hippocrates (ca. 460 BC – ca. 370 BC), who created the Hippocratic Oath — guiding principles so compelling that it guides today's doctors and many health care professionals. These principles can be simplified into three words, "Do no harm."

Choosing an Eastern Ethical Philosophy

In Asia, the basis for a system of ethics could rest on a different assumption—one which incorporates principles used by the over one billion people practicing Hindu religion and Buddhist philosophy.

In this case, the idea of karma (from Sanskrit Karman) presents a foundation for business ethics in an Asian context. Essentially, karma implies cause and effect, a relationship between positive and negative consequences coming about as a result of actions, speech and thought. If you cause harm to others, harm returns to you—perhaps in this life perhaps in the next. Therefore, if your business ethics do good, good returns. If your business activities harm individuals or groups, harm comes back to you.

Causes of Ethical Dilemmas in Business

It's difficult to run a large enterprise so that it does no harm given the Core Concepts of running a public corporation—many business executives do not even try. But it's important to examine each of the five Core business Concepts in view of the harm it could cause and the negative karma it generates.

Ethics Issue 1: Maximizing Shareholder Wealth

Modern corporations are extremely good at generating wealth. But one might ask, "Where does all this wealth go?" A cynic might say it goes to the executives and the CEO's; but really, most of it goes back to the shareholders, either directly in the form of dividends or indirectly in the form of stock appreciation as measured by earnings per share.

Unfortunately, this wealth transfer can create ethics dilemmas since there are other corporate stakeholders who can be hurt by a singe-minded focus on maximizing shareholder wealth. For example, employees often get paid less so stockholders can get paid more.

Ethics Problem 2: Profit Maximization

It a commonly accepted core concept of business that the primary goal of the public corporation is to maximize its profits. There is nothing wrong with profits. However, this relentless, unceasing drive for maximum profits creates a number of problems for business stakeholders.

To maximize profits executives could do harm to stakeholders by:

• Continually squeezing costs out of the supply chain
• Lowering costs by decreasing product quality
• Decreasing operational costs necessary to meet customer expectations
• Decreasing employees' salaries by not keeping up with the true rate of inflation by using core inflation numbers
• Decrease benefits to employees and to retirees to "stay competitive"

In an article within the December 3, 2007, issue of Business Week, titled The Taxman Barely Cometh, for example, it was mentioned that the nominal corporate tax rate is in America is 35%. However, some corporations are managing to reduce taxes paid to 4% or less. The author rationalizes this by saying, "There is nothing wrong, of course, with minimizing taxes."

However, thoughtful people should ask whether it is ethical for individuals or businesses who do not pay their fair share of taxes to support government services. For doing so harms government's ability to provide needed services.

This drive for profit maximization also affects the realm of social responsibility and charitable giving. For example, in an article in the June 30th 2008 issue of The Korea Herald, it was reported that the "Top eight lenders in Korea earned more than 10 trillion won ($9.5 billion) in combined net profit last year. Yet their social contributions spending was only 120 billion won or 1.2 percent of the total profit."

Unfortunately, a number of the concepts associated with profit maximization are euphemisms or rationalizations that mask the expression of greed.

Greed is inherent in capitalism. In some cases, it is associated with aggression. Greed not balanced by generosity or temperance, creates strong motivation to harm individuals, stakeholder groups and even entire societies.

Corporate greed was symbolized by the American corporation Enron— a company that took profit maximization to an extreme. Unfortunately, policy makers failed to learn from the collapse of Enron, in 2001, then America's 7th largest corporation.

Government inattention during 2001 to 2007 then allowed greed on Wall Street to overcome the risk management function inside many mortgage banks and investment banks (See also The Economist: Confessions of a Risk Manager).

Bottom-line, short-term greed on Wall Street resulted in these firms committing "financial hari kari" that decimated the balance sheets of many powerful American and European banks.

Ethics Dilemma 3: Increasing Return on Investment (ROI)

"Whenever decisions are made strictly on the basis of bottom-line arithmetic, human beings get crunched along with the numbers." Thomas Horton, President and CEO, American Management Association, Management Review, January 1987

Unfortunately, businesses sometimes do foolish things in the name of return on investment (ROI), internal rates of return (IRR), hurdle rates and net present value. This is partly due to the ease at which we can put numbers to the costs. But benefits typically are more difficult to nail down. For example:

We know the cost of schools, but can't quantify the benefits of reducing ignorance.

We can capture the costs of leadership training, we cannot quantify the benefits of better leaders.

We can capture the costs of research and development but not put a number on the benefits of innovation.

We can easily put a cost number on the safety program, but the dollar benefits of lives saved and limbs retained remain vague.

We can put a cost on air pollution controls, but how much is it worth for you to breath clean air? In some cities today, people can go days without seeing the blue sky. How do you ROI blue sky?

Unfortunately, business is driven by the numbers—numbers that may not be accurate.

Ethics Issue 4: Externalities

"The numbers don't lie."— A common belief about corporate financials

Sometimes business doesn't capture all the benefits; in other cases, they don't capture all the costs. This is the case with externalities. Externalities are financial liabilities that do not appear on balance sheet, cash flow reports, or the income statement.

Traditionally, externalities have been waste generated as part of the production process. According to the CIA Fact Book, environmental damage affects almost all countries in the world. Unfortunately, much of that damage is a result of business activities.

Some counties such as China bear a heavy burden resulting from environmental damage associated with rapid industrialization (see also The World Bank).

Even in nations with long standing pollution controls, health care costs from pollution are high. In America, estimates of health costs from air pollution run from .8 percent to 3 percent of GDP.

In 2007, the Noble Peace Price went jointly to Al Gore for his movie " An inconvenient Truth" and to the many hundreds of scientists who make up the Intergovernmental Panel on Climate Change (IPCC). As a result, the world has awoken to the danger of a new externality; a "Greenhouse Effect" largely caused by the carbon dioxide generate from burning fossil fuels such as oil, natural gas, wood and coal.

Ethics Problem 5: Fiduciary Responsibility

As it is defined here, fiduciary responsibility applies to the duties of corporate directors to act in the "best interest" of the corporation. If directors interpret this mandate narrowly, there is a short-term focus on profits that will ultimately harm both society and the company itself.

For example, for many years American car makers resisted the imposition of higher fleet mileage standards. The federal government finally forced the change in 2007. Paradoxically, adapting higher mileage standards years earlier would have been in Detroit's best interest since the American publics love affair with Detroit's higher margins, low gas mileage SUV's and pickups was a fickle one the disappeared along with low gas prices.

Conclusion

Success in business is hard, acting with a strong sense of ethics in business is harder still. Corporations that act socially responsible and sustainable require managers, executives and boards of director to ask the right questions—to question how to apply the Core Concepts in ways where harm is not generated. Only then can we formulate the right answers to the ethical dilemmas facing modern corporations.