I’ve left this for posteriority. My views have changed substantially since I wrote this nearly a decade ago. If you must read it, please do so with generosity.
The Essential Challenge of Ethical Business
Being ethical in today’s world isn’t easy. There are a host of systemic, structural, political, and cognitive factors in the business context that make discerning the right thing to do and then acting on it more challenging than ever before. Despite this, another set of developments has created a world where acting ethically in all areas of business is perhaps the most imperative driver of business success. Business ethics has undergone a change from regulatory requirement or inconvenient distraction to a necessity for the global marketplace and source of competitive advantage.
We humans are meaning-making beings. More than reason, the ability to use tools, or the ability to create complex social systems, what sets us apart from other species is the ability to ask ourselves “why?” and consider the answer important. Philosophers from Aristotle in the 4th century BC to 20th century philosophers like Paul Tillich and Jean-Paul Sartre have pointed out that it is the ability, in fact the indispensability, of answering questions of existential import that defines humanity. Our responses to the questions of “why” and “how” go a long way to defining who we are. How we spend our lives, whom we choose to love and why, and what we find ourselves called to do in our careers are the central questions of value that make us who we are.
Paradoxically, the economic system we live under has no such values. Capitalism, in its pure form, is amoral. Although many libertarians argue that there is an implicit moral code to capitalism, it is inchoate and partial at best. Whereas we human beings choose what we will do based a variety of existential and practical factors, capital responds only to cash flows. Notwithstanding recent trends toward socially responsible investing, the vast majority of investment decisions are made not in terms of what makes the world a better place but strictly on the basis of risk-adjusted net present value. Milton Friedman, in his famous 1970 New York Times Magazine article, argued that the only responsibility of a firm is to increase profits and to consider any social impacts was in fact unethical.
Beyond lacking a moral compass, there are several factors within modern market-oriented capitalism that actually militate against ethical and socially responsible decision-making. Friedman felt that as long as something was legal, it was permissible. However, the structure of western democracies allow large corporations a voice in making the laws, thereby encouraging all sorts of externalities and, in some cases, outright fraud. The recent “Citizens United” decision by the U.S. Supreme Court has given corporations an even greater role in governmental policy, and the quarterly reporting structure of the capital markets encourages short-term thinking without consideration for the long-term impacts of meeting each period’s earnings estimates.
Beyond these structural and political factors, there are also cognitive and social factors that make consistently good ethical decision-making challenging. Recent academic and popular works by authors Dan Ariely, Max Bazerman, Zoe Chance, and Francesca Gino (among others) have focused on the ways our minds and our social situations influence our ethical decision-making, usually without our even knowing it. A successor to behavioural economics, this nascent field of “behavioural business ethics” was the sole topic of the most recent British Journal of Management, one of the most respected academic journals in study of business. What Ariely, et al, have done is shown how even people with the best intentions and motivations can be led astray in their decision-making by mental blind spots and distortions like anchoring, overestimating the ethical behaviour of both ourselves and those in our social group, and underestimating the creative and technical contributions of others. Whereas ethical behaviour has historically been considered a simple issue of character and will, these scholars have shown it to be the result of a complex interplay of factors that make context and corporate culture almost as important as moral fibre.
The New World of Consumer and Employee Power
Even if the combination of the amorality of capitalism, the systemic challenges of capital-driven corporate performance, and the emerging understanding of the complexity of ethical decision-making were the totality of why principled business performance was important, it would still be one of the most important aspects of business one could study and, hopefully, effect. These factors are, however, only half the story. In spite of all these challenges to effective ethical decision-making, a series of cultural, social, and technological innovations in recent past have elevated the significance of business ethics to what should be the highest place among the concerns of management.
Corporations were previously able to craft their image to control information and perceptions of themselves and used command-and-control, hierarchical governance structures to insure employee performance. These methods no longer function. Customers and employees now demand that the firms they buy from and work for are in alignment with their values and the ways they make meaning in their lives. Even though many of the factors discussed in the first section traced from the dawn of industrial capitalism, both employees and consumers couldn’t do (and, in many cases, didn’t want to do) anything to change them. There was a dearth of information about the ways companies did business and what information was available was carefully managed. Companies had extensive marketing operations that were aimed at instilling a specific set of ideas, associations, and feelings about the firms. Very little was left to chance and what customers knew about a company and operations was what the company wanted them to know.
With the advent of the collaborative Internet, where anyone can express any opinion and share any information, this way of doing business is rapidly going the way of the buggy-whip. Blogs, forums, easy to set-up protest web sites like bankofamericasucks.com, and, most recently, Wikileaks, are creating a totally transparent (if not always accurate) world where nothing about a firm can be hidden from the public. The corporate communications department is no longer primarily a shaper of perceptions but is instead focused on engaging the public in co-developing brands. Due to this information chaos, whatever a company does will eventually come to light. No longer can a firm engage in ethically suspect behaviour presuming it is the manager of public perception. With this new transparency, and with the increasing engagement of customers as intentional consumers, the need for proactive transparency has become paramount.
It’s not just consumers who require that companies align with their values, but employees, as well. In the past two decades, we’ve seen a wholesale shift from industrial work to knowledge work and consequentially a shift in how employees see themselves and their relationship to their employers. As Peter Drucker noted, knowledge workers don’t exist thrive within the traditional industrial command-and-control framework but instead are co-creators of value and, as such, are responsible for managing themselves. They therefore have come to demand more meaningful work, more meaningful participation in governance, and closer alignment of their work to their values. And, as with consumers, they are increasingly able to determine whether the work they do indeed matches their higher aspirations. Nothing will cause an exodus of the very knowledge workers who are essential for business success faster than internal politics and hierarchical governance systems, except for perhaps outright unethical business practices.
Principled Business Culture = Winning Competitive Strategy
The shift from marketing and branding to transparency for consumers and the shift from command-and-control industrial governance to participative knowledge work for employees have combined to exponentially magnify the importance of ethical and sustainable business practices. Business ethics is no longer something limited to the compliance department so that it can check the appropriate boxes to stay out of trouble with regulators and enforcement agencies. It’s a critical aspect of competitive advantage. And as such it’s something that has to be part of everything a company does, in its DNA, its corporate culture.
This, I think, is the crux of the matter regarding ethical business and principled performance. It goes far beyond training and risk management where it’s traditionally lived and is instead a vital part of a company’s strategy. A principled corporate culture can’t be duplicated easily, if at all. In a business world where innovation and continuous improvement are the necessary conditions for success, the value of an engaged and passionate workforce can’t be overstated.
Unanimity is rare in academic literature, but the closest I’ve ever seen is the consensus that corporate culture is the primary determinant of ethical behaviour. My own experience bears this out, as well. When I worked for Washington Mutual’s corporate technology group, the ethical standards were very high and it was assumed that one owed a primary allegiance to the truth. In the rare cases when ethical dilemmas presented themselves (such as accepting gifts from vendors), there was, once acculturated, no question of what the right thing to do was, nor was there really any question of not doing it. Conversely, when I worked for Long Beach Mortgage Company (the sub-prime business unit of the same corporation), a business unit that had been acquired and which had an entirely different culture, it was very difficult to raise these ethical issues. It was, in fact, the realisation of how easy it is for good people to make bad decisions when influenced by corporate culture that inspired me to change careers back to one that was more aligned with my ultimate values. There were times when I should have spoken up, to question the investment bankers and the corporate leadership, but because I was new in my position and the culture inhibited that sort of dialogue, I remained silent. Though I’m not so self-centred as to believe that I could have averted the sub-prime crisis (see the fantastic The Big Short http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393072231, Michael Lewis’s newest book, for more reasons why) , I might have at least cushioned the blow for WaMu and left with a clear conscience.
Since then I’ve done quite a bit of time reflecting on these issues, and I’ve concluded that, for the reasons above and given my experience as a consultant, teacher, and researcher, helping businesses achieve principled performance is the best possible path for my career. There are many people who can do business strategy consulting, many others that can do technology strategy consulting. In trying to figure out my unique value in the world of business, I realised that there are very few people with the business and technology background I have who are also deeply committed, interested, and sophisticated about business ethics. As a strategist, you help companies determine what their unique capabilities are and how they can bring those to the market. In the past two years, I’ve turned my strategist lens on myself and realised that working for a company whose mission is helping companies deliver principled performance would be the best use of not only my skills and experience, but my passion and my sense of what’s ultimately important. It’s this pursuit of significance, of existential as well as commercial success, that has driven me to explore the possibility of working with try to find a position with a firm that specialises in ethics and compliance.
Capital and Conscience 