Essay: Ethics in Business Has Become a Hot

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Ethics in business has become a hot button issue in recent years, in light of a number of scandals in the early 2000s, but also with the whole issue of corporate social responsibility. There are different dimensions to ethics, some of which are obvious like conducting business legally, but other issues create a moral dilemma, which is where a grey area exists and there is no one right answer -- all answers create some sort of negative outcome and you have to make a choice between two things where perhaps there is no real winner -- it's not a dilemma when the choice is win-win

The other aspect of the moral dilemma is where there is a tradeoff with respect to the agency role of management and the social responsibility of the firm. This is the classic dilemma, because in many cases the two are mutually exclusive. The manager must act in the best interests of the shareholders, but this usually involves creating negative externalities, because maximizing shareholder wealth often requires externalizing some of the costs of doing business. A more socially responsible company pays those costs, which reduces shareholder wealth. It has been argued frequently that the only ethical obligation managers have is to the shareholders to earn profit

Easier?

It has not become easier to behave in an unethical manner. Such a claim actually makes no sense, on multiple dimensions. The first dimension on which the idea of it being easier to behave unethically rests on the idea of man's control over his own behavior. Where Descartes argued that "the will is by its nature so free that it can never be constrained," others have disagreed with this position, arguing that there are some constraints. Hume also supports Descartes' position that we each have within us free will to act or not act; constraints that exist are those applied externally

. Thus, we are free to do as we please, but there may be consequences to this.

It is those consequences which serve as bounds to our behavior, especially if we presume individuals -- managers in particular -- to be rational actors. The presumption of rationality is used in economic models in particular because it helps the models to work by eliminating a key unpredictable variable, but in the real world managers are not perfectly rational. They will make decisions that ultimately prove to be irrational. Take an example of a high-profile case of ethics -- the Martha Stewart situation. Her insider trading netted her a relatively small amount of money, for which she did six months in prison. Surely, her time in Sing cost her quite a bit more than the hundred thousand or so she saved with the insider trading, and really had she known she was going to be prosecuted she would have probably made a smarter choice. But this is an example of how actors are not purely rational -- a rational Stewart would have sucked up the decline in the stock because it had the better long-run payoff. Instead, she opted for the unethical choice, and did so on purely irrational means.

So with respect to ethics in business, such unethical decisions tend to be irrational, because the expected payoff is lower than behaving ethically. The reason for the irrationality is that the person making the decision does not believe they will be caught. So this is how laws constrain ethical decision -- making. They help to frame the consequences of an action, putting the costs of that action into perspective. One of Friedman's core arguments was that it was the duty of government to set the bounds of social responsibility in business, not the managers of the business, who should be acting rationally in the best interests of the shareholders. Friedman was not arguing to unethical behavior as such, just that the bounds of ethics should be set by government, which in a democratic society should reflect the will of the people within that society -- thus the ethical parameters.

From this we can determine two things. First, free will as it is generally understood means that, no, is it not easier to be unethical. It is just as easy as it always was, in terms of an individual's ability to act freely. You can always choose to commit an unethical act -- there are still murders every day, after all -- which means that the real question is this: Has it become easier to get away with being unethical?

This is the important question, especially to the degree that we accept free will inherent in rational actors -- that people are more likely to commit unethical acts if they feel that they will get away with it. In many instance -- Enron, Tyco, Martha Stewart -- the actor was not acting rationally, and presumably assumed as most criminals do that they will not get caught. But even with a faulty cost-benefit analysis to committing an unethical act, the decision might still be rational. This means that the higher the perception of costs associated with the act, the more likely the person will perceive those costs to be too high, and will exercise free will in a way that is oriented towards some concept of ethical behavior (remembering that ethics themselves are often in the eye of the beholder).

Two factors increase the potential costs to unethical behavior. First, an increase in public awareness of ethical issues, both criminal and those related to corporate social responsibility, has resulted in increased scrutiny from both media and government. New laws, for example, have been enacted to try to increase the costs associated with unethical behavior -- Sarbanes-Oxley being a good example

. One outcome of the passage of this law was that some executives saw benefit to going private, so that they specifically could avoid the provisions of this law that increased the cost of unethical behavior

-- it is interesting that many executives genuinely felt a law that asks companies to behave ethically was a threat to them.

The second factor that increases the potential costs to unethical behavior is technology, which has made for a more transparent world in general. With more eyeballs -- especially watchdogs and activist shareholder groups -- it is harder to people to get away with unethical behavior. It is harder to mask activities, especially when there are digital records, and therefore harder to get away with such behavior. This increases the risk of getting caught, which even for a rational actor increases the expected cost of the behavior. This should discourage people. So while anybody can engage in whatever unethical behavior they want, and that has not change since the dawn of humankind, it is probably more difficult to get away with unethical behavior today, which should result in less of it.

Creating an Ethics-Oriented Business

In a sense, creating an ethics-oriented business seems like a bizarre concept. To accept this is something you would specifically set out to do accepts that the basic human condition is to behave unethically, and those impulses need to be controlled. I understand that some religious traditions hold unethical behavior to be inherent in society but I'm not interested in those traditions, just in the reality of human nature. So I reject the underlying basis for the concept -- humans are not inherently unethical and need to be governed in order to make them behave ethically. We as a society set out our own ethical codes, and they will tend to reflect the values of the majority, so the unethical people are going to be the outliers by definition.

The result of this is that you mostly need to curb that outlier behavior. For me, that starts with the start -- don't hire these people in the first place. Companies in the past have used all kinds of shorthand assumptions to keep unethical people out of their workforce -- this led to everything from racist policies to dictates on facial hair and tattoos. Today, we can approach this in a smarter way, and many companies do as part of their recruitment and selection processes. There are four steps to this. The first is to create an ethical profile -- you have to know what you are looking for and what specifically you do not want in your organization. The second step is to develop tests for these traits and values. The third step is pre-screening, for example during the CV screening process. The fourth step is during the interview, where specific questions or scenarios are presented that will provide insight into the ethics of the candidate. Getting the right people into the organization who share the organization's ethical compass is an essential first step in ensuring that the organization has a coherent sense of ethics

There are other steps that the company must undertake as well. Creating the ethical culture requires a good starting point in ethical people, but then the norms and values of the company need to be established… [END OF PREVIEW]

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