Meeting Ethical and Financial Obligations
One of the most central challenges that companies face today is how to respond to the current economic crisis in a way that meets their financial and legal obligations without compromising their commitment to ethical behavior. President Barack Obama had this in mind during his recent inaugural address.
First, he began his address with “My fellow citizens,” not “My fellow Americans,” which some commentators have pointed to as an indication of how much the address was an essay on the responsibilities of citizenship.
Reflecting on the workings of the economy, the president said:
[The market's] power to generate wealth and expand freedom is unmatched. But this crisis has reminded us that without a watchful eye, the market can spin out of control; that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity, on our ability to extend opportunity to every willing heart, not out of charity but because it is the surest route to our common good.
And, emphasizing that government alone will not be able to solve our current problems, he said:
For as much as government can do, and must do, it is ultimately the faith and determination of the American people upon which this nation relies.
Obama’s comments effectively give us two key guideposts for staying on track ethically during the current economic crisis.
First, all of us are citizens first — and executives, teachers and firefighters second. Accordingly, in tough times, all citizens have a role — and a duty to assume that role — in setting things right. And it’s critical to see that this is an ethical duty. The most fundamental, universal ethical principle is: “Do no harm.” It’s fair to say that engaging in business activities that harm the common good runs against the basic obligations of a citizen.
Second, the “job” of an economy is to satisfy the material needs of the people served by that economy. The ultimate measure of an economy’s legitimacy and success is whether it provides all members of a society with the material means to live a life with dignity. The creation of wealth is simply a means to that end — it is not an end in itself. In short, we need to remind ourselves that business is primarily about jobs, goods and services.
Given the current crisis, then, how should citizens in business operate so that they meet their ethical obligations? And how should businesses operate so that their central mission is to do their part of the “job” of the economy? The following three principles could help frame our particular answers.
1. Question Assumptions About the Way “The Market” Works.
One of the things that got us into this mess was a blind acceptance of an ideology about how “the market” works. To his credit, even Alan Greenspan confessed to having been reduced to “shocked disbelief” at how things unfolded, and he admitted that at least some of his thinking about the free market was flawed.
Going forward, business decisions need to take into account the limits and vulnerabilities of the free market. We simply cannot assume that leaving things to “market forces” is a safe strategy. In practice, “the market” does not operate the way it’s advertised.
Consider these central tenets of free-market capitalism:
- The market is governed by the pursuit of self interest. This is the ultimate counterweight to any excesses. People aren’t self-destructive.
- A rising tide floats all boats. Prosperity at the top of the economy will inevitably produce prosperity at the bottom.
Anyone who still believes that this is an accurate description of contemporary capitalism hasn’t been paying attention. Please retire your Milton Friedman collection.
According to a United Nations report in 2006, the richest 1 percent of households in the United States own about 40 percent of all wealth. The top 5 percent owns 60 percent. The top 20 percent owns 80 percent. However, the bottom 20 percent owns zero wealth. Over the last 30 years, there has been a sharp increase in the degree of inequality of wealth in the U.S. If there is an “invisible hand,” it has been dealing from the bottom of the deck.
What this means is that decisions in business can produce long-term harm in the lives of real people. Ask if your decisions are contributing to “rigging the game” by benefiting a few people at the expense of others.
2. Make the “Job” of Business and Operating Ethically a Priority.
Remind yourself daily what the “job” of the economy is — and how your business helps it do that job — and what kind of community our economy is supposed to be serving. Our society takes things like ethics, fairness, equality and respecting the dignity of the human person seriously. If you trash these for the sake of making a buck, you’re essentially a criminal. Recognize that doing business ethically isn’t about character; it’s about being able to evaluate accurately the ethical character of the actions you’re considering — recognizing their impact on others and being aware of the extent to which people are being treated appropriately.
One day, Barney Rosenberg, the group ethics and business conduct manager for Meggitt Plc, told me the story of being at a DuPont facility that takes safety so seriously that, at the start of each meeting, someone explains what to do if there’s a chemical leak and shows where the exits and eye-washers are. He then came up with a great suggestion for ensuring that ethics is part of the day-to-day conduct of business: Every business meeting should include something parallel about ethical risks. My suggestion for how to do this is that, at some point, a meeting should ask if there are any ethical issues — Is what we’re doing going to hurt anyone or put anyone at the risk of harm? and Are we treating anyone inappropriately? — and if so, how will these issues be handled. Think of it as an exercise in risk management. And think of how much better off all of us would be now if those questions were taken seriously over the last 30 years.
3. Are You a Member of the C-Suite or a Board? Appreciate the Value Of Humility.
While there is plenty of blame to go around for the economic disaster, the hubris of too many U.S. CEOs and the lack of proper oversight by boards must be recognized as major factors. Yet notably absent for the leaders of the companies that foundered are any signs of responsibility — or a sense of humility — for the harm their decisions produced. Instead, we see a continuation of the attitude that has grown over the last 30 years, where many U.S. CEOs have behaved like Renaissance nobility — a breed apart from the rest of us, entitled to run their companies in a way that benefits the few at the expense of the many. Former Merrill Lynch Chief Executive John Thain’s $35,000 commode is only the newest symbol of this mind-set.
The damage caused by such hubris has led not simply to a waste of corporate funds; it has undermined the integrity of corporate cultures. A driving force here is U.S. CEO compensation, which is regularly more than 450 times that of the average worker. This ratio far outstrips that of CEOs in other countries. By contrast, from 1990-2004, the pay of the average American worker remained relatively flat.
Anyone who thinks that such fundamental unfairness and greed do not corrode the cultures of the companies involved is naïve. Particularly in difficult times, it is unrealistic to think that a leader can be optimally effective with ordinary employees when that CEO becomes independently wealthy for only one year’s work.
Recognizing the importance of putting aside one’s own interest for the sake of advancing that of others — one dimension of the virtue of humility — would do much to repair the damage that has been done here. Humility on the part of leaders produces considerable good will that can be harnessed in productive directions. It is time for humility to replace hubris in determining how much a U.S. CEO should be paid.
But another dimension of humility is a willingness to recognize the limitations of one’s thinking. In this case, despite a belief that the conventional mechanisms for finding the best candidates for the highest levels of corporate life do not discriminate, this turns out to be false. Old habits have led to de facto discrimination at the very top.
- Only six Fortune 500 CEOs are African-Americans; only 8 percent of Fortune 500 board seats were held by African-Americans in 2004; 32 percent of Fortune 500 companies have no African-American directors.
- There are only 13 female CEOs in the Fortune 500; women make up only 1 out of 6 company directors.
The result for the tilted outcome shows that there has been some bias in corporate cultures and in the selection process. Humility encourages us to re-evaluate our beliefs and actions to see if they achieve the goals we want them to. Such humility requires us to recognize that we can be wrong and that we can commit to do things differently, respectfully and ethically.
Our New Duty
There is no underestimating the difficulties involved in repairing the economy while remaining committed to ethics. There will surely be ongoing temptations to improve the bottom line by compromising on values or by seeking profit at the expense of the common good. This will be a daily and difficult struggle. However, even here, President Obama’s inaugural words are applicable.
Our challenges may be new, the instruments with which we meet them may be new, but those values upon which our success depends — honesty and hard work, courage and fair play, tolerance and curiosity, loyalty and patriotism — are old. They have been the quiet force of progress throughout history.
What is demanded then is a return to these truths. What is required of us now is a new era of responsibility — a recognition, on the part of every citizen, that we have duties to ourselves, our nation and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.
Thomas White is a professor of business ethics at Loyola Marymount University and is the director of the Center for Ethics and Business at the school’s College of Business Administration. He has written four books and numerous articles on topics ranging from applied business ethics to gender issues to Renaissance humanism.
