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Ethics and the executive
Ethics and the Executive ttarold L. Johnson
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Harold L. J o h n s o n is a professor of e c o n o m i c s at E m o r y University in Atlanta.
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Profitable business is, by and large, ethical business. n a time when bribes, illegal payoffs, price conspiracies, and accusations of social irresponsibility continue to tarnish the image of American business, the problem of ethics in the free enterprise system remains a vital and difficult issue. Ethics, of course, involve more than business, and both influence and reflect the values of our society as a whole. A group of researchers from Yale University have carefully developed a position on the nature of ethical business behavior in our society. 1 They divided ethical meaning into t w o categories. Into one category falls all that behavior based on the "moral m i n i m u m " of not harming others--of accepting the "negative injunction" to avoid or correct social injuries which acc o m p a n y personal activity. The second category represents the "affirmative d u t y " to attack social problems of poverty, discrimination, or urban decay. These observers concluded that business executives and corporate organizations, constrained by the social role of producing goods and services for consumers, are ethical if they reduce adverse impacts of production upon groups and individuals harmed b y business activity.
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1. The book is John Simon, Charles W. Powers, and Jon P. Gunneman, The Ethical Investor: Universities and Corporate Responsibility (New Haven: Yale University Press, 1972).
Their position is that the task of corporate enterprises is to turn out the products necessary for individual and social well-being; other organizations such as community groups, political parties, and governmental bodies, have the assignment of seeking to meet broad social problems. Business managers thus are not called upon to solve all the nation's difficulties. The moral minimum which confronts them is a reduction of injuries caused b y the processes they manage. These analysts responded to the criticism that this is a niggardly understanding of ethical behavior with the following comment: "The application of negative injunctions, to be sure, will not rebuild cities or make deserts bloom, b u t it can limit or halt the destruction of life, of opportunity, and of beauty. They may not be enough, b u t it is a great deal" (Simon, et al: 14). The executive should remember, however, that the meaning of injury to others changes with a shifting social context. At one time, child labor, sixty-hour weeks, polluted rivers, and dangerous factories were regarded as acceptable. So, the definition of ethical business behavior can be counted on to shift with changing social expectations. The general principle remains the same, however. Given this "moral m i n i m u m " definition of ethical business behav-
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"Ethics in business would be relatively simple if the manager were always confronted with choices between good and evil, but most business decisions involve choices between two or more goods or two undesirable options."
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ior, it follows that it is profitable for business to follow the ethical rules o f society. Profitable business is by and large ethical business, for sanctions are visited upon those who violate prescribed behavior. Aside from prosecution, punishments include adverse publicity, low employee morale and deteriorating productivity, loss of sales, and government intervention. If this were all that there was to it, moral direction of business would be simple. However, the complex dynamics of inter-business relationships can trap managers and their corporations because it does pay some "innovators" in deceit and dishonesty to cut corners in methods of commerce and thereby violate social norms. In the pressure to maintain competitive positions, most firms in that industry may feel compelled to move to the behavior with the lowest-common denominator. But once this practice spreads throughout the industry everybody often becomes worse off than before. The initial competitive advantage gained by unethical efforts is lost when everybody is doing it. The "follow-the-leader" to the " b o t t o m of morality" strategy leads to disaster. Everybody's profits shrink as unethical practices accelerate costs--or government changes the game entirely. In the long-run, then, Adam Smith's views of two centuries ago remain pertinent. The analysis of the market process presented by Smith both in Moral Sentiments and in Wealth o f Nations is that of economic affairs taking place within a web of social and legal expecta-
II tions concerning justice and benev- hiring versus seniority rights, for olence. The social framework of example, firms might pay generous ethical, moral, and just behavior is severance compensation to those an intrinsic part of the tacit coordi- who are laid off to save them some nation of human behavior that of the hardships of unemployment. Smith stresses in the Wealth o f Tax assistance to affected enterNations. Human life in the model prises might shift the costs of disof Smith is not a chaotic jungle red crimination to the community-atin t o o t h and claw. For him, partici- large where they might be better pants in the market game who seek absorbed. to maximize gains are policed and A related challenge to ethical directed both by the social forces decision making is that sometimes of competition and of ethics to a good and evil seem to be joint general advance in human welfare. products of the same flow of events. A desirable result is accompanied by a negative one. Probably Moral Dilemmas the classic case of this nasty predicthics in business would be ament is the pollution or exhausrelatively simple if the man- tion of resources which often acager were always confronted companies high standards of living with choices between good and evil, and technology. Where such positives and negabut most business decisions involve choices between two or more goods tives are in a vital area, the assessing or two undesirable options. For of relative benefits and costs finally example, the hiring of more minori- is done through the political proties and w o m e n is a highly com- cess. The American people through mendable goal and a requirement. Congress, courts, and state legislaYet in a recession it conflicts with tures decide how to weigh out costs the purpose of seniority which en- and benefits. A case in point is the sures job stability to long-time, job/pollution dilemma in the case usually white male, workers. Im- of the Reserve Mining Corporation proved pension and disability pro- in northern Minnesota dumping grams are a long-sought good in the their taconite ore railings into Lake American economy, but they may Superior. Research can sometimes turn a conflict with the perhaps equally negative into a positive. Dow Chemimportant goal of price stability. So, the concerned executive can ical Corporation, for example, conbe frozen into inertia by the dilem- tends that by imaginative innovam a of trading one good for another. tions in equipment and processes it What is called for is a weighing of has transformed virtually all of its relative benefits and costs to reduce polluted wastes into marketable the trade-off problems. Creative, products. No one could pretend concerned analysis may show which that in each instance of a " g o o d " alternatives have the fewest draw- linked with a "bad," research or creative innovation could break the backs. In the case of minority/female connection. Thus the ethical man-
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Ethics and the Executive
55 a ger may find no clearcut way out of this perplexity. Fortunately, however, investigative exploration often does develop ways of shattering the joint p r o d u c t linkage. In America, jobs, production, and a c,Leaner environment were being simultaneously achieved during the 1970s. Thus no manager should be hypnotized into inactivity by the formidable challenge of sorting out the positive from the negative. Ethical choices would also be much simpler if decided in a context of single one-to-one relationships. If only the boss and employee were affected, or supplier and parchasing executive, then right decisions would be easy to uncover. But choices usually affect different people in different ways, and managers are usually involved with stockholders, suppliers, employees, competitors, dealers, consumers, fellow executives, and the community-at-large. Often what would appear to be the moral act from the standpoint of one corporate constituency may result in hardship to others. Benefits to a labor force generally mean a disadvantage to shareholders. A policy of high wages for employees already attached to the enterprise may result in pockets of u n e m p l o y m e n t in the c o m m u n i t y , making jobs impossible for others eager to work for the company. A strategy of rock b o t t o m prices which helps consumers may mean deteriorating profits to subcontractors and poor working conditions for employees. Such conflicts pose cruel dilemmas for the concerned manager. One thing seems clear, however:
the executive should not expect to work through such dilemmas b y hunch, whimsy, or selfish interest, doing only what seems best at the moment. Executives must get their hands dirty, entering into the tensions and conflicts of decision, not because it is fun to be a person of power, but because the choices need to be made. If someone must be fired, if dividends to "widows and orphans" are cut, or if rival firms are unavoidably threatened with losses, these decisions should not be a game b u t acts of responsibility. The concerned executives must carry in heart and mind the haunting awareness that as often as they help some, others are harmed; they can only hope that the "hard decisions" are the best that can be made under the circumstances. Difficult choices arise partly from the diversity of counterpulling individuals and g r o u p s - a diversity which reflects the strength and flavor of a democratic system based on free individual action. In both the corporate state of fascism and the industrial establishments of communism, an objective is to destroy conflicting interests of people, molding them into a singleminded, cohesive apparatus. Thus the dilemmas of the manager in our society in part reflect the independence of free persons. Dissociation from Responsibility he dilemmas also derive, however, from group aspects of corporate decision making. It is too much to expect managers, even those with an extraordinarily ethical turn of mind,
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to arrive alone and with Olympian detachment at the most satisfactory solution in a complex situation. Executives are hardly disinterested bystanders in the interactions of corporate life. Decisions made ostensibly for the benefit of employees, stockholders, consumers, or community may actually be motivated by the personal interest of the deciding executive. Individual managers make decisions within a corporate structure of roles, rules and organizational anonymity, sometimes doing things in the organization that they wouldn't do elsewhere. In an organizational environment it isn't J o h n Smith or Mary Doe who approves bribes, illegal payments to political parties, or unlawful price conspiracies. It is these persons a s president, vice-president, or manager of the XYZ corporation. It is the job that requires personally distasteful chores. Why is this the case? Why does corporate bureaucracy encourage a diminution in a moral approach to issues? The reasons are not clear, but personal responsibility is often lost in a structure of committee decision making, a structure which minimizes individual responsibility. Anonymity characterizes many actions in a large corporation so that it is difficult to ascertain who did what in the maze of joint decision making and communication. The development of a particular policy has many contributors and many phases, so who is to say which person or step led to disaster? The processes of corporate action are so complex that n o o n e can fully comprehend what is going on.
"At some point official loyalties, roles, and positions must be subordinated to an allegiance to more fundamental principles than the short-run good of the organization or personal career."
56 The president, for example, is in large measure a creature of the severely edited and channeled reports that reach his or her desk. Inspection trips and on-the-scene investigations add only modest glimpses into the manifold "ramifications of a multi-billion dollar operation with thousands of employees and millions of customers. In fact, decisons may be facilitated-and top officers protected b y - a n ignorance of some of the messy details of tough business. Perhaps you won't be pilloried in the press, sued in the courts, or fined by regulatory agencies if you plead ignorance about deplorable corporate practices. Somebody else is responsible. Second, the corporate culture fosters a team loyalty which makes it difficult for individual morality to be expressed. Employees who blow the whistle are branded as disloyal to the company. Not only do they lose their jobs, but other firms generally refuse to hire "troublemakers" who can't play by the rules of organizational loyalty. Judging from news reports, a tacit "black list" of whistle blowers operates, so that they often must completely shift fields and accept much lower incomes. To be regarded as a "team player" is high praise for government or business executives. Additionally, there often is a confluence of personal motivation with these organizational characteristics that accentuates the problem of ethical choice. The goal of many managers is to climb as high as possible up the corporate salary pyramid. A bigger job and a larger
income, reasonable and challenging distinguish between corporations goals in themselves, thus may be- which have good and bad perforcome the "gods" or ultimates of mance in terms of responsible, ethilife for aspiring executives. With cal practice. Milton Moskowitz, a this kind of motivational focus, journalist who for years has specialbending ethical rules or keeping ized in the study of business and your mouth and eyes discreetly society, has done studies classifying shut to illegal or irresponsible prac- corporations in terms of comparatice is a small price to pay for tive social performance. 2 Similarly, personal success. the Business Week Citizenship All these factors suggest that Awards for social responsibility sugmore responsible practices cannot gest considerable variety within the be wished into place with simple business c o m m u n i t y in its response remedies such as the publication of to larger societal needs. It is notecorporate codes of conduct. worthy that particular enterprises Changes in organizational structures are sufficiently outstanding in their and processes apparently are re- policies to warrant commendation. quired in order to reduce the anoAttitudinal surveys reveal conn y m i t y of decision making. The siderable diversity of personal valcorporate culture must be changed ues and social views among Ameriso that individuals of integrity are can executives. One survey, connot penalized when their loyalties ducted by Frederick Sturdivant and include more than their corporate James Ginter, was based on questionnaire results from 130 senior team. It may help for executives to executives employed by corporalearn some stark lessons from tions in the Moskowitz classificaWatergate. One such lesson is that tion. Their study shows significant at some point official loyalties, contrasts between executives of the roles, and positions must be subor- "best" and "worst" companies. 3 dinated to an allegiance to more Managers with the "best" enterfundamental principles than the prises were more favorable toward short-run good of the organization minorities, the poor, and other asor personal career. The corporate pects of human rights than were decision maker is not only a private executives in the "worst" compaperson with a conscience, but also a citizen. These aspects of character 2. Milton Moskowitz, "Social Responsibilmust be allowed to flourish in an ity Portfolio 1973," Business and Society, organizational context. January 1974: 1; "Profiles in Corporate ReEstablished Ethical Lessons
espite everything, however, ~many executives are ethical in their corporate behavior. Careful observers have been able to
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sponsibility," Business and Society Review, Spring 1975: 28-42; "46 Socially Responsible Corporations," Business and Society, July 1974: 8. 3. Frederick D. Sturdivant and James L. Ginter, "Corporate Social Responsiveness: Management Attitudes and Economic Performance," California Management Review, Spring 1977 : 30-39.
Ethics and the Executive
57 nies. On broad matters of public behavior and policy, from hair length and forcible entry b y the police upon suspicion of illegal behavior, for example, to general openness to change in society, and the priority of profits over environmental protection, there were significant differences. In the words of the investigators, "the best managers (managers of corporations classified as 'best' in corporate social performance) reflect a greater concern for individual rights and a gceater responsiveness to demands for change in the social and economic system" (Sturdivant, p. 36). This study seems to indicate that corporations ranked high in social responsiveness also have senior managers who are more broadminded, socially aware, and sensitive to their world. The research also concluded that firms ranking ~ g h in social responsibility also ranked high in their industries in growth in earnings per share from 1!764 to 1974. Corporations in both "honorable m e n t i o n " and " b e s t " categories out-performed the rest of their industries in profits, while " w o r s t " companies fell below average in their industries. Senior management style and action are key factors in the ethical atmosphere of a corporation. Other elements operate, too, b u t employees quickly learn about the character of their company from the behavior of the chief executive. As someone once stated, "If the boss winks, he will find c o m p a n y employees winking b a c k " with illegal, corner-cutting behavior. The CEO communication can
be explicit pressure to "get the business at all costs," or it can be more subtle in its desire not to know any of the deceptive and illegal practices by which the company operates. The president may avoid legal suits, fines, or jail sentences b y pleading ignorance. The signal also could come from top management using the company as a personal fiefdom: taking the company aircraft for pleasure trips, employing corporate funds for mansions and yachts, or taking extensive foreign trips the business purposes of which are not at all clear. Robert Ackerman has also charted the crucial role top management plays in shaping b o t h the environment and the policy of their companies. 4 From extensive field study research, Ackerman concludes that a social responsiveness posture and program succeed only as the leaders of the enterprise initiate, foster, and encourage the firm to greater social responsibility. Positive actions of the chief executive are necessary for a company innovating social policies, but are not sufficient for complete success. Full success requires a social issues staff with expertise on many perplexing difficulties, and explicit changes in the processes of the firm to facilitate ethical, responsive decisions. But motivating energy for such institutional innovation flows from the executive suite of the corporation. Recent developments, however, 4. Robert Ackerman and Raymond Bauer,
Co~oorate Social Responsiveness: The Modern Dilemma.
suggest that another group important to shaping the moral atmosphere of a company are directors who are not executives or officers of the company. As a consequence, at least in part, of court suits and fear of damage claims for alleged dereliction of duty, many outside directors are becoming serious watch dogs and monitors of corporate practice. Their auditing role and their ability to raise independent questions about policy matters gives them strong potential for helping influence the basic character of American corporations. A number of proposals call for a strengthening of the policing and monitoring functions of outside directors. Very few executives would publicly express the view that a freeenterprise, market economy dictates that profits should be sought and maximized in any way possible. Most managers have a much more civilized concept of profit maximization. The mainstream judgment of managers is that a profit system functions within legal constraintsand a consequent "bare bones" ethical requirement is that legal limits on business be obeyed. A related "bare bones" precept of ethical behavior hangs on the status of corporate managers as agents and employees. Law books are full of discussions emphasizing that executives are not "the real bosses" of corporate enterprises. They are hired hands, agents, or underlings of the directors and stockholders who employ them. A trend of legislation and c o m m o n law declares that managers are in
58 fidiciary positions of trust which limits their personal opportunities and actions. The obligations of executives can be classified under a duty of loyalty and a duty of care. s The duty of loyalty circumscribes managers in many different ways, for example, from trading in securities of their companies where superior information gives them advantage over present and prospective shareholders. A duty of loyalty also requires that the corporate manager not give information concerning the company to selected outside parties, tipping them a b o u t important material developments within the corporation. The executive must not mention these developments to any outsiders or the material must be generally and fairly distributed to the investing public. Thus, the right to b u y stock in a c o m p a n y that y o u work for does not exist if information importantly affecting the transaction is not available to all. When information is withheld from the general public for what could be construed as legitimate c o m p a n y reasons, managers cannot engage in stock transactions. Thus, a rather obvious basic ethical requirement is that corporate managers should not bend the enterprise to their personal interests. Their role as agents should imply that the best interests of stockholders is uppermost among criteria for decision making. Irving Kristol, an outstanding conservative 5. See Frederick G. Kempin, Jr., and Jeremy L. Wiesen, Legal Aspects o f the Management Process: Cases and Materials (St. Paul, MN: West Publishing Co., 1969): 614-16.
c o m m e n t a t o r on the American scene, set out in the Wall Street Journal (April 16, 1975) a catalog of practices b y which executives twist the firm to their benefit, thus violating this elementary rule of corporate ethics. Such unethical practices include the repurchase with c o m p a n y funds at a low price of securities which had been sold at high share prices when the company went public. Insiders thus enrich themselves at the public shareholders' expense. Stock options coupled with loans from the corporation to bail managers out of market difficulties are another example of manipulating corporate policy to the disadvantage of stockholders. Executives use companies as their private banks in ways that clearly are not available to owners. On occasion, executives look more like privileged beneficiaries of power in the organization rather than agents. Stock options also are adjusted to bail out the executive in a slumping securities market. This has the direct effect of benefiting the manager when the performance of the corporation is deteriorating, a reverse kind of managerial incentive system. 6 Executive salaries and perquisites which are close to or exceed seven figures would, finally, seem at least prima facie evidence that the servant/agent role of top management is too often subverted in an exercise of organizational power. It is easy to admonish blue collar 6. Irving Kristol, "Ethics and the Corporation," Wall Street Journal, April 16, 1975: 18.
workers, clerks, and junior executives to abstain from employee theft, expense account padding, and other financial handicaps to stockholders. But the ethical requisite of conforming to the agent• fidiciary role which corporate law fastens on middle and top managers means they also are n o t to seek personal advantage b y manipulating their insider positions or corporate policy. This situation may present an uncomfortable paradox in a corporate enterprise system. Maximization of profit within the law is the presumed guiding principle, b u t the principle also asks executives to forego to considerable degrees their own interest as they amass earnings not for themselves b u t for their employee stockholders. Apparently in some instances this asks too much restraint and ethical perception of corporate executives. The rule stands, however. It is unethical to maneuver a fiducial position of trust for personal benefit. This is a conclusion of agency law deriving from medieval times. Follow the Leader
oo often discussions of ethical questions revolve around personal choices and behavior. Should one use call girls to get more business? What about padding expense accounts or requiring a kickback in order for a supplier to do business with your firm? The analysis thus far indicates that these are not merely personal matters; ethical behavior is essentially social, and is part of a moni-
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Ethics and the Executive
"The research also concluded that firms ranking high in social responsibility also ranked high in their industries in growth in earnings per share from 1964 to 1974."
59 toring, control apparatus of society. Furthermore, ethical choices are made in corporate settings where tensions between an agent/stewardship role and the preferences of self-interest may be considerable. Ethics thus encompass more than an individual salesperson using sex to sell goods or receiving expensive gifts from suppliers at Christmas. There is a dynamic interplay b e t w e e n individuals or corporations that makes the subject of moral business decisions important not only to individual decision makers but for the market system as a whole. Unethical choices may build through a chain reaction a new society of government intervention mad c o n t r o l - o r society may evolve into violent anarchy where it truly is "every person for himself." Fortunately, however, a n u m b e r of empirical studies indicate that firms in the same industry do n o t "play follow the leader" to deplorable levels of business performance. Some firms continue with responsive, commendable social performance even when others do the opposite. The Council on Economic Priorities, for example, has conducted a
number of industry studies of social performance, all showing the common pattern that firms within the same industry differ in social behavior. In the paper and pulp industry, for example, companies such as Owens-Illinois and Weyerhauser have outstanding records of pollution control while St. Regis, Potlatch, and Diamond International show poor environmental performance. Others such as Crown Zellerbach and U.S. PLV-Champion have average pollution records. It has been noted earlier that companies with stronger anti-pollution performance also tend to make the most money. 7 Similar instances of such diverse business behavior can be found among manufacturers of infant formula and of petrochemicals. According to knowledgeable observers, some infant formula enterprises have more responsible marketing practices in developing countries than other c o m p a n i e s - s u c h companies apparently do not succumb to the pressures to conform to the 7. Council of Economic Priorities, Paper Profits (1970) and Council of Economic ties, "Pollution Audit," Economic Priorities Report (July-August, 1972).
lowest c o m m o n denominator of behavior. 8 A Moskowitz survey shows a similar pattern of behavior in the petrochemical industry. Standard of Indiana and Dow Chemical are rated as "best," Mobil Oil and Atlantic Richfield as "honorable mention," and Standard of California and Texaco as "worst." There appears to be little competitive dynamic to push Standard of Indiana to the lower performance of Standard of California. In fact, an alternative to government regulation requiring improved social performance would be to alter the behavior of firms at the lower level. If Standard of Indiana and Dow Chemical can both generate good profits and be socially responsible, why can't Texaco and Standard of California follow their example? It doesn't take Adam Smith to raise that provocative but fundamental ethical question. [52 8. 8. Prakash Sethi and James E. Post, "Marketing of Infant Formula Food in Less Developed Countries: Some Public Consequences of Private Actions." Paper presented at the Academy of Management Meetings, 1978.
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Harold L. J o h n s o n is a professor of e c o n o m i c s at E m o r y University in Atlanta.
II
Profitable business is, by and large, ethical business. n a time when bribes, illegal payoffs, price conspiracies, and accusations of social irresponsibility continue to tarnish the image of American business, the problem of ethics in the free enterprise system remains a vital and difficult issue. Ethics, of course, involve more than business, and both influence and reflect the values of our society as a whole. A group of researchers from Yale University have carefully developed a position on the nature of ethical business behavior in our society. 1 They divided ethical meaning into t w o categories. Into one category falls all that behavior based on the "moral m i n i m u m " of not harming others--of accepting the "negative injunction" to avoid or correct social injuries which acc o m p a n y personal activity. The second category represents the "affirmative d u t y " to attack social problems of poverty, discrimination, or urban decay. These observers concluded that business executives and corporate organizations, constrained by the social role of producing goods and services for consumers, are ethical if they reduce adverse impacts of production upon groups and individuals harmed b y business activity.
I
1. The book is John Simon, Charles W. Powers, and Jon P. Gunneman, The Ethical Investor: Universities and Corporate Responsibility (New Haven: Yale University Press, 1972).
Their position is that the task of corporate enterprises is to turn out the products necessary for individual and social well-being; other organizations such as community groups, political parties, and governmental bodies, have the assignment of seeking to meet broad social problems. Business managers thus are not called upon to solve all the nation's difficulties. The moral minimum which confronts them is a reduction of injuries caused b y the processes they manage. These analysts responded to the criticism that this is a niggardly understanding of ethical behavior with the following comment: "The application of negative injunctions, to be sure, will not rebuild cities or make deserts bloom, b u t it can limit or halt the destruction of life, of opportunity, and of beauty. They may not be enough, b u t it is a great deal" (Simon, et al: 14). The executive should remember, however, that the meaning of injury to others changes with a shifting social context. At one time, child labor, sixty-hour weeks, polluted rivers, and dangerous factories were regarded as acceptable. So, the definition of ethical business behavior can be counted on to shift with changing social expectations. The general principle remains the same, however. Given this "moral m i n i m u m " definition of ethical business behav-
53
"Ethics in business would be relatively simple if the manager were always confronted with choices between good and evil, but most business decisions involve choices between two or more goods or two undesirable options."
54 III
II
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III
ior, it follows that it is profitable for business to follow the ethical rules o f society. Profitable business is by and large ethical business, for sanctions are visited upon those who violate prescribed behavior. Aside from prosecution, punishments include adverse publicity, low employee morale and deteriorating productivity, loss of sales, and government intervention. If this were all that there was to it, moral direction of business would be simple. However, the complex dynamics of inter-business relationships can trap managers and their corporations because it does pay some "innovators" in deceit and dishonesty to cut corners in methods of commerce and thereby violate social norms. In the pressure to maintain competitive positions, most firms in that industry may feel compelled to move to the behavior with the lowest-common denominator. But once this practice spreads throughout the industry everybody often becomes worse off than before. The initial competitive advantage gained by unethical efforts is lost when everybody is doing it. The "follow-the-leader" to the " b o t t o m of morality" strategy leads to disaster. Everybody's profits shrink as unethical practices accelerate costs--or government changes the game entirely. In the long-run, then, Adam Smith's views of two centuries ago remain pertinent. The analysis of the market process presented by Smith both in Moral Sentiments and in Wealth o f Nations is that of economic affairs taking place within a web of social and legal expecta-
II tions concerning justice and benev- hiring versus seniority rights, for olence. The social framework of example, firms might pay generous ethical, moral, and just behavior is severance compensation to those an intrinsic part of the tacit coordi- who are laid off to save them some nation of human behavior that of the hardships of unemployment. Smith stresses in the Wealth o f Tax assistance to affected enterNations. Human life in the model prises might shift the costs of disof Smith is not a chaotic jungle red crimination to the community-atin t o o t h and claw. For him, partici- large where they might be better pants in the market game who seek absorbed. to maximize gains are policed and A related challenge to ethical directed both by the social forces decision making is that sometimes of competition and of ethics to a good and evil seem to be joint general advance in human welfare. products of the same flow of events. A desirable result is accompanied by a negative one. Probably Moral Dilemmas the classic case of this nasty predicthics in business would be ament is the pollution or exhausrelatively simple if the man- tion of resources which often acager were always confronted companies high standards of living with choices between good and evil, and technology. Where such positives and negabut most business decisions involve choices between two or more goods tives are in a vital area, the assessing or two undesirable options. For of relative benefits and costs finally example, the hiring of more minori- is done through the political proties and w o m e n is a highly com- cess. The American people through mendable goal and a requirement. Congress, courts, and state legislaYet in a recession it conflicts with tures decide how to weigh out costs the purpose of seniority which en- and benefits. A case in point is the sures job stability to long-time, job/pollution dilemma in the case usually white male, workers. Im- of the Reserve Mining Corporation proved pension and disability pro- in northern Minnesota dumping grams are a long-sought good in the their taconite ore railings into Lake American economy, but they may Superior. Research can sometimes turn a conflict with the perhaps equally negative into a positive. Dow Chemimportant goal of price stability. So, the concerned executive can ical Corporation, for example, conbe frozen into inertia by the dilem- tends that by imaginative innovam a of trading one good for another. tions in equipment and processes it What is called for is a weighing of has transformed virtually all of its relative benefits and costs to reduce polluted wastes into marketable the trade-off problems. Creative, products. No one could pretend concerned analysis may show which that in each instance of a " g o o d " alternatives have the fewest draw- linked with a "bad," research or creative innovation could break the backs. In the case of minority/female connection. Thus the ethical man-
E
Ethics and the Executive
55 a ger may find no clearcut way out of this perplexity. Fortunately, however, investigative exploration often does develop ways of shattering the joint p r o d u c t linkage. In America, jobs, production, and a c,Leaner environment were being simultaneously achieved during the 1970s. Thus no manager should be hypnotized into inactivity by the formidable challenge of sorting out the positive from the negative. Ethical choices would also be much simpler if decided in a context of single one-to-one relationships. If only the boss and employee were affected, or supplier and parchasing executive, then right decisions would be easy to uncover. But choices usually affect different people in different ways, and managers are usually involved with stockholders, suppliers, employees, competitors, dealers, consumers, fellow executives, and the community-at-large. Often what would appear to be the moral act from the standpoint of one corporate constituency may result in hardship to others. Benefits to a labor force generally mean a disadvantage to shareholders. A policy of high wages for employees already attached to the enterprise may result in pockets of u n e m p l o y m e n t in the c o m m u n i t y , making jobs impossible for others eager to work for the company. A strategy of rock b o t t o m prices which helps consumers may mean deteriorating profits to subcontractors and poor working conditions for employees. Such conflicts pose cruel dilemmas for the concerned manager. One thing seems clear, however:
the executive should not expect to work through such dilemmas b y hunch, whimsy, or selfish interest, doing only what seems best at the moment. Executives must get their hands dirty, entering into the tensions and conflicts of decision, not because it is fun to be a person of power, but because the choices need to be made. If someone must be fired, if dividends to "widows and orphans" are cut, or if rival firms are unavoidably threatened with losses, these decisions should not be a game b u t acts of responsibility. The concerned executives must carry in heart and mind the haunting awareness that as often as they help some, others are harmed; they can only hope that the "hard decisions" are the best that can be made under the circumstances. Difficult choices arise partly from the diversity of counterpulling individuals and g r o u p s - a diversity which reflects the strength and flavor of a democratic system based on free individual action. In both the corporate state of fascism and the industrial establishments of communism, an objective is to destroy conflicting interests of people, molding them into a singleminded, cohesive apparatus. Thus the dilemmas of the manager in our society in part reflect the independence of free persons. Dissociation from Responsibility he dilemmas also derive, however, from group aspects of corporate decision making. It is too much to expect managers, even those with an extraordinarily ethical turn of mind,
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to arrive alone and with Olympian detachment at the most satisfactory solution in a complex situation. Executives are hardly disinterested bystanders in the interactions of corporate life. Decisions made ostensibly for the benefit of employees, stockholders, consumers, or community may actually be motivated by the personal interest of the deciding executive. Individual managers make decisions within a corporate structure of roles, rules and organizational anonymity, sometimes doing things in the organization that they wouldn't do elsewhere. In an organizational environment it isn't J o h n Smith or Mary Doe who approves bribes, illegal payments to political parties, or unlawful price conspiracies. It is these persons a s president, vice-president, or manager of the XYZ corporation. It is the job that requires personally distasteful chores. Why is this the case? Why does corporate bureaucracy encourage a diminution in a moral approach to issues? The reasons are not clear, but personal responsibility is often lost in a structure of committee decision making, a structure which minimizes individual responsibility. Anonymity characterizes many actions in a large corporation so that it is difficult to ascertain who did what in the maze of joint decision making and communication. The development of a particular policy has many contributors and many phases, so who is to say which person or step led to disaster? The processes of corporate action are so complex that n o o n e can fully comprehend what is going on.
"At some point official loyalties, roles, and positions must be subordinated to an allegiance to more fundamental principles than the short-run good of the organization or personal career."
56 The president, for example, is in large measure a creature of the severely edited and channeled reports that reach his or her desk. Inspection trips and on-the-scene investigations add only modest glimpses into the manifold "ramifications of a multi-billion dollar operation with thousands of employees and millions of customers. In fact, decisons may be facilitated-and top officers protected b y - a n ignorance of some of the messy details of tough business. Perhaps you won't be pilloried in the press, sued in the courts, or fined by regulatory agencies if you plead ignorance about deplorable corporate practices. Somebody else is responsible. Second, the corporate culture fosters a team loyalty which makes it difficult for individual morality to be expressed. Employees who blow the whistle are branded as disloyal to the company. Not only do they lose their jobs, but other firms generally refuse to hire "troublemakers" who can't play by the rules of organizational loyalty. Judging from news reports, a tacit "black list" of whistle blowers operates, so that they often must completely shift fields and accept much lower incomes. To be regarded as a "team player" is high praise for government or business executives. Additionally, there often is a confluence of personal motivation with these organizational characteristics that accentuates the problem of ethical choice. The goal of many managers is to climb as high as possible up the corporate salary pyramid. A bigger job and a larger
income, reasonable and challenging distinguish between corporations goals in themselves, thus may be- which have good and bad perforcome the "gods" or ultimates of mance in terms of responsible, ethilife for aspiring executives. With cal practice. Milton Moskowitz, a this kind of motivational focus, journalist who for years has specialbending ethical rules or keeping ized in the study of business and your mouth and eyes discreetly society, has done studies classifying shut to illegal or irresponsible prac- corporations in terms of comparatice is a small price to pay for tive social performance. 2 Similarly, personal success. the Business Week Citizenship All these factors suggest that Awards for social responsibility sugmore responsible practices cannot gest considerable variety within the be wished into place with simple business c o m m u n i t y in its response remedies such as the publication of to larger societal needs. It is notecorporate codes of conduct. worthy that particular enterprises Changes in organizational structures are sufficiently outstanding in their and processes apparently are re- policies to warrant commendation. quired in order to reduce the anoAttitudinal surveys reveal conn y m i t y of decision making. The siderable diversity of personal valcorporate culture must be changed ues and social views among Ameriso that individuals of integrity are can executives. One survey, connot penalized when their loyalties ducted by Frederick Sturdivant and include more than their corporate James Ginter, was based on questionnaire results from 130 senior team. It may help for executives to executives employed by corporalearn some stark lessons from tions in the Moskowitz classificaWatergate. One such lesson is that tion. Their study shows significant at some point official loyalties, contrasts between executives of the roles, and positions must be subor- "best" and "worst" companies. 3 dinated to an allegiance to more Managers with the "best" enterfundamental principles than the prises were more favorable toward short-run good of the organization minorities, the poor, and other asor personal career. The corporate pects of human rights than were decision maker is not only a private executives in the "worst" compaperson with a conscience, but also a citizen. These aspects of character 2. Milton Moskowitz, "Social Responsibilmust be allowed to flourish in an ity Portfolio 1973," Business and Society, organizational context. January 1974: 1; "Profiles in Corporate ReEstablished Ethical Lessons
espite everything, however, ~many executives are ethical in their corporate behavior. Careful observers have been able to
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sponsibility," Business and Society Review, Spring 1975: 28-42; "46 Socially Responsible Corporations," Business and Society, July 1974: 8. 3. Frederick D. Sturdivant and James L. Ginter, "Corporate Social Responsiveness: Management Attitudes and Economic Performance," California Management Review, Spring 1977 : 30-39.
Ethics and the Executive
57 nies. On broad matters of public behavior and policy, from hair length and forcible entry b y the police upon suspicion of illegal behavior, for example, to general openness to change in society, and the priority of profits over environmental protection, there were significant differences. In the words of the investigators, "the best managers (managers of corporations classified as 'best' in corporate social performance) reflect a greater concern for individual rights and a gceater responsiveness to demands for change in the social and economic system" (Sturdivant, p. 36). This study seems to indicate that corporations ranked high in social responsiveness also have senior managers who are more broadminded, socially aware, and sensitive to their world. The research also concluded that firms ranking ~ g h in social responsibility also ranked high in their industries in growth in earnings per share from 1!764 to 1974. Corporations in both "honorable m e n t i o n " and " b e s t " categories out-performed the rest of their industries in profits, while " w o r s t " companies fell below average in their industries. Senior management style and action are key factors in the ethical atmosphere of a corporation. Other elements operate, too, b u t employees quickly learn about the character of their company from the behavior of the chief executive. As someone once stated, "If the boss winks, he will find c o m p a n y employees winking b a c k " with illegal, corner-cutting behavior. The CEO communication can
be explicit pressure to "get the business at all costs," or it can be more subtle in its desire not to know any of the deceptive and illegal practices by which the company operates. The president may avoid legal suits, fines, or jail sentences b y pleading ignorance. The signal also could come from top management using the company as a personal fiefdom: taking the company aircraft for pleasure trips, employing corporate funds for mansions and yachts, or taking extensive foreign trips the business purposes of which are not at all clear. Robert Ackerman has also charted the crucial role top management plays in shaping b o t h the environment and the policy of their companies. 4 From extensive field study research, Ackerman concludes that a social responsiveness posture and program succeed only as the leaders of the enterprise initiate, foster, and encourage the firm to greater social responsibility. Positive actions of the chief executive are necessary for a company innovating social policies, but are not sufficient for complete success. Full success requires a social issues staff with expertise on many perplexing difficulties, and explicit changes in the processes of the firm to facilitate ethical, responsive decisions. But motivating energy for such institutional innovation flows from the executive suite of the corporation. Recent developments, however, 4. Robert Ackerman and Raymond Bauer,
Co~oorate Social Responsiveness: The Modern Dilemma.
suggest that another group important to shaping the moral atmosphere of a company are directors who are not executives or officers of the company. As a consequence, at least in part, of court suits and fear of damage claims for alleged dereliction of duty, many outside directors are becoming serious watch dogs and monitors of corporate practice. Their auditing role and their ability to raise independent questions about policy matters gives them strong potential for helping influence the basic character of American corporations. A number of proposals call for a strengthening of the policing and monitoring functions of outside directors. Very few executives would publicly express the view that a freeenterprise, market economy dictates that profits should be sought and maximized in any way possible. Most managers have a much more civilized concept of profit maximization. The mainstream judgment of managers is that a profit system functions within legal constraintsand a consequent "bare bones" ethical requirement is that legal limits on business be obeyed. A related "bare bones" precept of ethical behavior hangs on the status of corporate managers as agents and employees. Law books are full of discussions emphasizing that executives are not "the real bosses" of corporate enterprises. They are hired hands, agents, or underlings of the directors and stockholders who employ them. A trend of legislation and c o m m o n law declares that managers are in
58 fidiciary positions of trust which limits their personal opportunities and actions. The obligations of executives can be classified under a duty of loyalty and a duty of care. s The duty of loyalty circumscribes managers in many different ways, for example, from trading in securities of their companies where superior information gives them advantage over present and prospective shareholders. A duty of loyalty also requires that the corporate manager not give information concerning the company to selected outside parties, tipping them a b o u t important material developments within the corporation. The executive must not mention these developments to any outsiders or the material must be generally and fairly distributed to the investing public. Thus, the right to b u y stock in a c o m p a n y that y o u work for does not exist if information importantly affecting the transaction is not available to all. When information is withheld from the general public for what could be construed as legitimate c o m p a n y reasons, managers cannot engage in stock transactions. Thus, a rather obvious basic ethical requirement is that corporate managers should not bend the enterprise to their personal interests. Their role as agents should imply that the best interests of stockholders is uppermost among criteria for decision making. Irving Kristol, an outstanding conservative 5. See Frederick G. Kempin, Jr., and Jeremy L. Wiesen, Legal Aspects o f the Management Process: Cases and Materials (St. Paul, MN: West Publishing Co., 1969): 614-16.
c o m m e n t a t o r on the American scene, set out in the Wall Street Journal (April 16, 1975) a catalog of practices b y which executives twist the firm to their benefit, thus violating this elementary rule of corporate ethics. Such unethical practices include the repurchase with c o m p a n y funds at a low price of securities which had been sold at high share prices when the company went public. Insiders thus enrich themselves at the public shareholders' expense. Stock options coupled with loans from the corporation to bail managers out of market difficulties are another example of manipulating corporate policy to the disadvantage of stockholders. Executives use companies as their private banks in ways that clearly are not available to owners. On occasion, executives look more like privileged beneficiaries of power in the organization rather than agents. Stock options also are adjusted to bail out the executive in a slumping securities market. This has the direct effect of benefiting the manager when the performance of the corporation is deteriorating, a reverse kind of managerial incentive system. 6 Executive salaries and perquisites which are close to or exceed seven figures would, finally, seem at least prima facie evidence that the servant/agent role of top management is too often subverted in an exercise of organizational power. It is easy to admonish blue collar 6. Irving Kristol, "Ethics and the Corporation," Wall Street Journal, April 16, 1975: 18.
workers, clerks, and junior executives to abstain from employee theft, expense account padding, and other financial handicaps to stockholders. But the ethical requisite of conforming to the agent• fidiciary role which corporate law fastens on middle and top managers means they also are n o t to seek personal advantage b y manipulating their insider positions or corporate policy. This situation may present an uncomfortable paradox in a corporate enterprise system. Maximization of profit within the law is the presumed guiding principle, b u t the principle also asks executives to forego to considerable degrees their own interest as they amass earnings not for themselves b u t for their employee stockholders. Apparently in some instances this asks too much restraint and ethical perception of corporate executives. The rule stands, however. It is unethical to maneuver a fiducial position of trust for personal benefit. This is a conclusion of agency law deriving from medieval times. Follow the Leader
oo often discussions of ethical questions revolve around personal choices and behavior. Should one use call girls to get more business? What about padding expense accounts or requiring a kickback in order for a supplier to do business with your firm? The analysis thus far indicates that these are not merely personal matters; ethical behavior is essentially social, and is part of a moni-
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Ethics and the Executive
"The research also concluded that firms ranking high in social responsibility also ranked high in their industries in growth in earnings per share from 1964 to 1974."
59 toring, control apparatus of society. Furthermore, ethical choices are made in corporate settings where tensions between an agent/stewardship role and the preferences of self-interest may be considerable. Ethics thus encompass more than an individual salesperson using sex to sell goods or receiving expensive gifts from suppliers at Christmas. There is a dynamic interplay b e t w e e n individuals or corporations that makes the subject of moral business decisions important not only to individual decision makers but for the market system as a whole. Unethical choices may build through a chain reaction a new society of government intervention mad c o n t r o l - o r society may evolve into violent anarchy where it truly is "every person for himself." Fortunately, however, a n u m b e r of empirical studies indicate that firms in the same industry do n o t "play follow the leader" to deplorable levels of business performance. Some firms continue with responsive, commendable social performance even when others do the opposite. The Council on Economic Priorities, for example, has conducted a
number of industry studies of social performance, all showing the common pattern that firms within the same industry differ in social behavior. In the paper and pulp industry, for example, companies such as Owens-Illinois and Weyerhauser have outstanding records of pollution control while St. Regis, Potlatch, and Diamond International show poor environmental performance. Others such as Crown Zellerbach and U.S. PLV-Champion have average pollution records. It has been noted earlier that companies with stronger anti-pollution performance also tend to make the most money. 7 Similar instances of such diverse business behavior can be found among manufacturers of infant formula and of petrochemicals. According to knowledgeable observers, some infant formula enterprises have more responsible marketing practices in developing countries than other c o m p a n i e s - s u c h companies apparently do not succumb to the pressures to conform to the 7. Council of Economic Priorities, Paper Profits (1970) and Council of Economic ties, "Pollution Audit," Economic Priorities Report (July-August, 1972).
lowest c o m m o n denominator of behavior. 8 A Moskowitz survey shows a similar pattern of behavior in the petrochemical industry. Standard of Indiana and Dow Chemical are rated as "best," Mobil Oil and Atlantic Richfield as "honorable mention," and Standard of California and Texaco as "worst." There appears to be little competitive dynamic to push Standard of Indiana to the lower performance of Standard of California. In fact, an alternative to government regulation requiring improved social performance would be to alter the behavior of firms at the lower level. If Standard of Indiana and Dow Chemical can both generate good profits and be socially responsible, why can't Texaco and Standard of California follow their example? It doesn't take Adam Smith to raise that provocative but fundamental ethical question. [52 8. 8. Prakash Sethi and James E. Post, "Marketing of Infant Formula Food in Less Developed Countries: Some Public Consequences of Private Actions." Paper presented at the Academy of Management Meetings, 1978.