Five Core Business Concepts Causing Ethical Problems For Organizations

By Murray Johannsen

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

Background

Since the year 2000, it has been estimated that 100,000 new MBA's from the top 50 business schools have entered the workforce world-wide. 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. Mindlessly following these Core Concepts will create ethical problems for these graduates and harm many in the societies in which they reside.

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

Choosing A Western Ethical Philosophy
	Image by: C-All

Philosophers and prophets throughout the ages have come up with a number of ethical principles to govern business conduct. All religions have a system of ethics and ethical standards—standards that often get codified into law. Moses's Ten Commandments are one example, but there are many others.

The enduring example of a system of professional ethics, one that could be adapted by business was developed by the Greek physician Hippocrates (ca. 460 BC – ca. 370 BC), who created the Hippocratic Oath — guiding principles so compelling it still guides today's doctors and health care professionals. These principles can be simplified into three words, "Do no harm." In fact, Google has something similar, a corporate credo which says to, "Do no evil."

Choosing an Eastern Ethical Philosophy
	Image by: Justin Gaurav Murgai

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

In this case, the idea of karma (from Sanskrit Karman) presents another foundation for business ethics. 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 actions do good, then good returns to you. If your business activities harm individuals or groups, harm comes back to you.

Causes of Ethical Dilemmas in Business

It's hard to run a large enterprise so that it does no harm given the Core Concepts, the core assumptions used in running a public corporation. It's important to examine each of the five Core business Concepts in view of the harm it causes and the negative karma it generates.

Ethics Issue 1: 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 problems since there are other corporate stakeholders who can be hurt by a singe-minded focus on maximizing shareholder wealth. For example, corporations can pay employees less, so stockholders get paid more.

Ethics Problem 2: Profit Maximization

It's a commonly accepted Core Concept of business that the primary purpose of the public corporation is to maximize profits. There is nothing wrong with ""healthy" profits. However, the relentless, unceasing drive for maximum profits creates a number of ethical problems for managers and executives.

Sound business ethics conflicts with profit maximization since profit maximization can harm a number of stakeholders. Some examples include:

• Increasing profits by continually squeezing costs out of the supply chain
• Lowering costs by decreasing quality
• Decreasing operational costs but then failing to meet customer expectations
• Decreasing benefits to employees and to retirees to "stay competitive."

Maximizing profits can be done by minimizing taxes paid. For example, in an article written in the December 3, 2007, issue of Business Week, titled The Taxman Barely Cometh, 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." Except, that these ethically challenged executives are not contributing to the countries that allow them to make their money.

Thoughtful people should ask whether it is ethical for individuals or businesses to not pay their fair share of taxes.

The drive for profit maximization also affects the realm of corporate 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, many European and American banks cannot even come close to the 1.2% number.

Profit Maximization as a Rationalization for Greed

Tragically, a large number of associated euphemisms, and even the term profit maximization itself, are really rationalizations masking the expression of greed.

Greed seems inherent, in-built within capitalism. In some cases, it becomes associated with aggression. Greed not balanced by generosity or temperance, creates strong motivation to harm individuals, stakeholder groups, the corporation, 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 meaningly lessons from the 2001collapse of Enron, then America's 7th largest corporation.

A worse manifestation of corporate greed occurred during during the 2000 to 2007 time fram. Combined with incredibly lax government regulation and over sight, it allowed the greed within large American banks to overcome the normal risk management functions inside these firms (See The Economist: Confessions of a Risk Manager).

Paradoxically, these firms ended up committing a form of "financial hari kari" that decimated their balance sheets and the blance sheets of many other Asian, American and European banks.

Ethics Dilemma 3: 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 much 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 leadership.

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

We can easily put a cost number on a 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?

Ethics Issue 4: Externalities

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

Business is driven by the numbers. Unfortunately, these numbers may not be that accurate. Sometimes, as in the case of ROI, corporations don'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 about waste generated as part of the production process.

From a business ethics standpoint, externalities allow corporations to damage environmental habitats or cause human heath problems. One can make a strong case that if an externality harms humans, that is a clear breech of ethics. However, many business people don't seem to grasp the ethical implications of externalities and environmental damage.

Some countries have very stringent environmental laws. In other cases, countries are quite lax. According to the CIA Fact Book, environmental damage affects almost all countries in the world. Some counties, such as China, bear an especially 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 business externality; a "Greenhouse Effect" caused by the carbon dioxide waste generated from burning fossil fuels such as oil, natural gas, wood and coal.

Ethics Problem 5: Fiduciary Responsibility

As 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 can ultimately harm both society and the business itself.

For example, for many years American car makers resisted the imposition of higher fleet mileage standards. The federal government finally mandated 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 margin, low gas mileage SUV's and pickups was a fickle one, disappearing with low gas prices.

Conclusion

Success in business is hard, acting with a strong sense of ethics while in business is harder still. For corporations to act socially responsible and to be sustainable require managers, executives and boards of director to ask the right questions—to question how to ethically 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 managers and executives.