Until perhaps only 15 years ago, business existed comfortably outside of civil society. Politicians, business people and scientists lived in peaceful co-existence, each recognising the sovereignty of their separate states. The rest of society understood their dependence on business for employment, taxes and the contribution to the economies of developed and developing countries that business provided. Like the complex ecosystem that thrives under our oceans, the little fish lived off the big fish, the big fish ate the little fish and the myriad of other species made sure they kept out of the way, while eking out an existence for themselves.
All of that changed at around the time of the first Earth Summit in 1992, where what had been evolving over the previous 10 years was given a name and subsequently became a movement. Inexorably, the social nature of business’s role became apparent and the growing voice of consumer discontent turned to an audible roar. There is a theory in social change that people only become concerned about change when it is deemed to have an immediate and direct effect on their lives. What we have seen in the last 20 years with the rise of environmentalism, coupled with the growth of consumer militancy, is a suspension of that belief and the emergence of a world wide psyche that is prepared to support agents for change no matter how distant the cause from the lives of those supporting it. Look at the phenomenal growth of the NGO (non government organisations) and not-for-profit (NFPS) sector. Notwithstanding the fact that governments around the world have withdrawn from many services now being provided by NFPs, the fact is that NFPs be they in the social or environmental sectors are fast becoming the public face and voice of civil society and have enjoyed an inordinate growth in size and power over the last 50 years. Membership of 7 major environmental groups in the US grew from 5.3 million to 9.5 million between 1980 and 1990, while in the social sector, NFPs in 22 countries employed 19 million full-time paid employees and 1.2 million full-time volunteers working for international NFOs in France, Germany, Japan, Netherlands, Spain and the UK. Around one-quarter of the 13,000 international NGOs in existence in 2000 have been created since 1990. Potently, it is the NGO sector that enjoys the highest trust ratings by the public and the average person in the street is more likely to believe an NGO representative than today’s government minister or business leader.
At the same time, public scrutiny turned towards business as many people woke up to the frightening power of the corporation and activist organisations such as Greenpeace turned the spotlight on corporate corpulence. The law did its bit by increasing the penalties for misconduct and extending its reach behind the corporate veil and prosecuting directors for dereliction of their fiduciary and social duty. In the United State, the Federal Sentencing Guidelines were enacted giving regulators powers to prosecute unethical corporate acts and in Europe the codification of the EU treaties into a draft constitution put business on notice that it could no longer stand outside the gates of civil society while enjoying the benefits it derived from that society.
So what is business ethics?
Finding a simple definition of business ethics however can be like diving for pearls in a sea of porridge! A useable definition is more than just a convenient coupling of words into a convenient phrase that displays lots of intent but does not signify any intent to act. As Paul Tillich famously said, “Ethics is not a subject, it’s a life put to the test in a thousand daily moments.” Often people use the terms “ethics” and “morality” interchangeably, believing them to be the same thing, when they are not. Ethics is a much larger area of study that includes the study of morality and standards of a society and how people decide what is right and wrong. It seeks to evaluate the moral standards used by different societies or within a society at a certain point of time and how these are arrived at and justified. We become engaged in the ethical debate when we begin to evaluate the moral standards we have been socialised into and compare these to other decision making frameworks such as Buddhism, Islam, or Judaism. Business ethics looks at the behaviour standards promoted by organisations inside the organisation and externally in relation to marketplace dynamics, host societies and increasingly, the natural environment.
The main ethical frameworks are still those that we have inherited from ancient philosophers but these obviously pre-date the development and expansion of the modern corporation so that business struggles to adapt these philosophical theories to 21st century thinking or issues. And yet, although there is not a clear agreement on what constitutes ethical behaviour in a business context, there is increasing pressure to develop and promote a modern-day model of shared understanding and commitment to ethical business practices. Since most people first approach business ethics from the perspective of morality and argue that morality and business ethics are the same thing, this is probably as good a place as any to begin building a contemporary definition of business ethics.
Personal morality and ethical behaviour
The idea of right and wrong are moral concepts. Every society subscribes to a core set of values that sets its moral compass and these become the “unquestioned” values underpinning acceptable and unacceptable ways of behaving. Morals guide how people should behave and relate to each other. In western societies, our moral code rests on equal recognition of other people’s well-being and rights as well as our own. This recognition and the obligations it brings with it extends to each and every member of society, be they CEO or trainee, Queen or pauper. Morals derive their authority from outside the individual and usually from a higher authority such as society or religion. Our moral code has evolved from early Christianity, in particular from the Ten Commandments. And, as Solomon points out, even today our moral rules can appear as commands prefixed in terms of what one “should” or “ought” or “ought not” to do. Questions of morality include: “What ought I to do”, “What should I value” and “What sort of person should I become”. When we describe someone as being “amoral” we are saying that they do not adhere to the expected standards of right and wrong or that they do not recognise that such standards should be taken into consideration.
The fundamental moral principles in western societies include an unspoken consensus that killing, stealing, cheating and lying are unacceptable ways of behaving and people of “good” character do not engage in these activities. Many of us are guided by the principle that we treat others as we would like them to treat us, the so-called “Golden Rule”.
Being ethical as opposed to moral is essentially about accepting our interdependence with each other and taking the other’s needs into consideration before acting. This might at first glance seem a very loose and ill-defined term and grate with those who feel more comfortable with the more certain term ‘moral’. In a secular society like Australia however with its added dimension of multiculturalism, the notion of one set of morals that sits comfortably with a diverse range of cultures and religions creates tensions of itself. When you try to apply this unwritten or unspoken code to the workplace, you have the potential for a disastrous mismatch of ideals and values. At best these can lead to confusion and at worst can descend into organisational anarchy as members subscribe to different standards of behaviour and make value judgements about each other.
Legal compliance is only the base line of business ethical accountability. Business ethical integrity is closer to what is sometimes referred to as the spirit of the law. It encapsulates the ideal state that the law is seeking to promote – the higher ground. As such, it encourages the highest possible standards of behaviour rather than a minimalist compliance orientation to avoid legal prosecution. An ethical perspective has as its goal the protection of people and the planet against unnecessary harm and exploitation. It encompasses notions of accountability and responsibility to others because as humans they have innate rights even if these are not yet spelt out in local laws. Sophisticated concepts such as the “fair play”, “trust”, “respect’ and “mutual obligation” are the implicit aspects of “professional” behaviours of everyday business life that fall into the ethical realm. It is often assumed that they do not need to be spelt out in law because the sustainability of the marketplace and the well-being of civic life depend on adherence to these standards. It is sometimes forgotten that the ultimate purpose of regulation is to protect the market itself by promoting practices that will enable industry to thrive and at the same time protect consumers and society in general against commercial exploitation.
Business ethics at one level, therefore, is about responsible business practices as dictated by society at a point in time. Today these include all aspects of manufacturing, research and development as well as marketing, pricing and distribution. At yet another level, it is about the quality of the relationships being promoted both inside the company and externally between the organisation and its stakeholders. Management is now charged with the responsibility for ensuring that any potential adverse impacts are canvassed and minimised and where there are significant conflicts of interest and differing expectations these are resolved in a fair and transparent manner. Commercial organisations are being challenged to see themselves as community assets sharing the same norms and values as the wider society in which they are embedded and business ethical accountabilities a reflection of society’s current values and expectations. It is in this context that an increasing focus on business ethics has emerged and will continue to accelerate, as host societies demand greater transparency from business, and more jealously guard their right to confer or withdraw a social licence to operate. Savvy business leaders like Westpac’s CEO David Morgan, are already adapting their business success formulas to respond to the new needs and accountabilities being asked of business as illustrated below:
“Our view is that businesses that recognise successfully their social responsibilities tend to benefit in three major ways: they have loyal customers, their employees are motivated and happier working for a good and well-respected company and the company enjoys more public influence because its views are regarded as credible.”
-Dr David Morgan CEO Westpac CEDA Address 21 August 2000
Society has moved on from a narrow shareholder focus on the role of business and there has been a marked shift from seeing business not just as a narrow economic activity but one that has significant social, environmental and ethical impacts that profoundly shape the types of societies that emerge. Consequently, there is growing agreement that business has an implicit responsibility to those societies for the behaviour it spawns and the contexts it creates. Regardless of what an individual or an organisation believes about business practices, if society judges it to be unethical, that perception will directly affect the organisation’s ability to achieve its business goals. Business ethics therefore involves taking into account stakeholders’ perceptions of the extent to which the organisation respects their needs, seeks to balance conflicting interests and protects their wellbeing at all times.
The organisation’s accountability to this much wider range of stakeholders often arises because it is dependent on the goodwill of these stakeholders to continue to buy its products, to become its employees, to provide its working capital through investment in shares and to provide it with its legal licence to operate. This interdependence is not always made explicit but it is increasingly being acknowledged and publicly debated as part of the wider discussion on the future role of business. And modern day ethical accountabilities.
The true cost of unethical business is immeasurable. A personal or organisational reputation once lost is hard to regain but there are other significant costs that arise because of the complexity of relationships that are created as a consequence of building a business:
• Societal costs because of the need to impose stronger economic and legal sanctions on future generations of businesses by regulators concerned to avoid repeat transgressions
• Societal loss of faith in the business management as a profession which promotes widespread cynicism and mistrust about the business world in general
• a destabilisation of societal life because of loss of customer confidence in the ability of business to be fair and honest and low employee morale because employees feel let down or tainted by the unethical practices of peers and experience a loss of face with family and friends as pride in their workplace identity is stolen from them
A 1998 Australian research survey, for example, found that 58% of the public believed business had a responsibility to the community and 54% of potential consumers said such involvement would strongly influence their buying decisions. Today, the average person in the street seeks to be reassured that management will do the right thing, and, at a minimum, that right thing means doing no harm and at the other end of the continuum seeking to enhance societal welfare while enjoying sustainable profits.
Trust is a critical element here. Business organisations depend on the trust of those who have a stake in them be they shareholders, investors, employees, suppliers or trading partners. The spectacular global collapse of the accounting firm Andersens, a mature organisation of over 60 years, has been the most obvious recent example of the indivisibility of trust and ongoing business success. To maintain that trust Century21 society has deemed that organisational ethics is an important dimension of business life and that its leaders should be held accountable for how the organisation’s makes its profits. In addition, there is also the ethical accountability inherent in what products and services the business is engaged in. Few people today remain unaware that organisational products have the potential to harm, maim and even kill people be it through shoddy manufacturing processes or by the very nature of the product itself including food, tobacco, alcohol, pharmaceutical products, pesticides, explosives and armaments. So too, as companies engage in reengineering processes or move their production facilities around the globe in search of financial incentives and low labour rates, they can remove the livelihoods of thousands of people and therefore have significant social impacts in the communities left behind. All these activities are included on the modern day score card of business ethical accountabilities.
Boards of Australian companies face a sea change in collective attitude. The public no longer assume that good governance will ensure ethical conduct and socially responsible behaviour. The public backlash against practices such as low wages in the leisure apparel industry, branch closures in the banking industry, dubious marketing processes in the food and insurance industries and the launch of unsafe products in the manufacturing sector has demonstrated that society now believes that is has a legitimate part to play in corporate regulation. The immediate challenge is to move way past a legal compliance focus and develop sophisticated internal assessment measures that will ensure that both the tangible and intangible value of their businesses is being enhanced. Rather than restricting dialogue to a narrow range of shareholders, today’s Boards need to acknowledge the rights of and to engage with a wide range of stakeholders that have the ability to impact on overall business success. These include critical civic opinion leaders, business peers (industry reputations now rise and fall with the behaviour of organisational members), and local communities, as well as the more traditional shareholders, bankers and regulators. Such a move would recognise and respect the multiple relationships the organisation is involved in without detracting from shareholder accountabilities. The 1999 UK Committee of Inquiry report into a new vision for business) concluded that there is no fundamental clash between enhanced competitiveness on the one hand and meeting the diverse expectations of a wider circle of stakeholders on the other.
Ethics is no longer a purely personal concern. Nor is it something that organisational leaders can take for granted. The waves of corporate and political scandals that have characterised the emergence of the global marketplace have highlighted how institutionalised greed has made ethics everyone’s concern. While business is widely recognised as the most powerful force in raising living standards and helping the development of democratically elected governments, its shadow side is equally recognised and a well tuned sense of the ethical has become a “must have” for those in business wishing to create and belong to sustainable enterprises.
Business ethics is set to become a locus of discontent in the 21Century as the world of commerce is seen to impact on the global commons, on the air we breath and the water we drink; as it shapes global society in determining who gets what; as it is widely seen to have the potential to destabilise or enhance the welfare of the human race in equal measure. What is deemed to be “ethical” or “unethical” will define tomorrow’s social acceptability and, in a wider sense, what comes to be regarded as social reality.
While global values may be lived out differently in different countries, increasingly there is universal agreement on the unacceptability of certain business practices, resulting in the proliferation of both voluntary and regulatory behaviour codes designed to weave an ethical safety net below the global marketplace.
Here in the West, the notional divide between the short term, narrow interests of shareholders and accountability to a wider group of stakeholders impacted by the business will be hotly debated. Institutional investors will increasingly put a brake on the short term focus of the market place and demand greater accountability from Boards and business leaders, demanding that they balance what is good for business with what is good for society. Employees who cannot swap their employers as easily as individual investors can swap their investments will continue to demand that they be recognised as critical organisational stakeholders who, like shareholders, carry significant risks that justify greater respect from management by inclusion in decisions that affect them.
Ethical standards are not set by business but by society as a whole. This interface with society’s expectations and the way business gets done is shaping the public debate within which the nature of business ethics is being defined. The new social between business and civil society will ensure that the ethical debate around the extent of business accountabilities will continue to gather momentum. Business leaders will continue to be pressured to move beyond legal compliance and step up to the challenge of managing the ethical dimension of their enterprises.
The term “new realities” was coined by management expert Peter Drucker to describe the post-industrial society that emerged in the early 90s. In a watershed era for management thought, a succession of writers, including Tom Peters, Peter Senge, Charles Handy, Michael Porter, Gareth Morgan, John Elkington and Fred Hilmer identified the emergence of a sinuous relationship between the three dimensions of organisational life. No longer was business permitted to sit outside of society or merely to uncomfortably co-exist with it. Individuals could no longer separate the person they are in work from the person they are outside. The synthesis of the three “personalities”, the individual, the organisational and the social, into a connected whole that requires consistent and predictable behaviour both coherent with the social context of the organisation and aligned to the values being espoused became increasingly apparent.
Ethics happens at three levels but the three belong as integral parts of a whole. We coined the phrase “3D Ethics” to describe this phenomenon. A retiring partner in an accounting firm, in looking back over a long and distinguished career, lamented the fact that ethics is no longer something that is within us but now something that needs to be taught as part of a curriculum. A high school principal attending a conference that we spoke at said that her school had recently introduced ethics as a senior subject because the staff had become concerned at the decline in values her generation had taken or granted, such as honesty – a mobile phone found in the classroom automatically became the property of the finder – and respect, could no longer be assumed in younger generations. Unfortunately, we have to accept life as it is not as we would wish it to be. The compartmentalisation of life that was customary in the 60’s and 70’s is no longer acceptable to generations of young people brought up in a world where transparency and accountability are two vital values. The ‘include me’ world of modern civilisation will not tolerate notions such as ‘private vice; public virtue’. “Walk the talk” is no longer simply a catchy phrase but a mantra for an increasingly educated and informed populace that demands integrity from the public institutions that dominate their lives. In a world where 51 of the top economies in the world are corporations; where the turnover of the top 200 companies is equal to one quarter of the world’s economic activity; where the GDP of General Motors is greater than that of Denmark; where Shell has a greater GDP than Norway; where many global corporations employ more people that many nation states; and where an estimated 40,000 corporations transcend national boundaries, it is no wonder that people have become increasingly cynical about the motives of big business.
In an annual survey of consumers, the World Economic Forum at Davos has found for the past two years in a row that multi-national corporations sit second top of the list of least trusted institutions. It is perhaps of greater concern that democratically elected governments came top of the crop. The remediation of business has become a pressing concern for all leaders of MNCs, which explains the emergence of governance and corporate social responsibility as two critical areas of management in leading global companies.
21st Century governance requires that leaders find their voice and become comfortable with both speaking out and speaking up and participating in the major ethical debates. It is not enough to manage ethically and feel satisfied that “I’m doing my bit”. If business is, indeed, to raise the ethical floor business leaders must become impassioned advocates for social change. Ethical evolution will gather momentum in the coming years as gene technological breakthroughs, industrial research and geoscience advances catapult us into a turbulent era where the traditional boundaries between humans and nature will be challenged and taken-for-granted certainties dissolve. Never before have we been confronted with such immense power to shape our own destiny nor the enormous responsibility that comes with it. The very survival of the planet depends on the decisions made in the next 20 years. Developing a heightened awareness of our interconnectedness and the ethical accountabilities this brings has never been more necessary.
All data and information provided on this blog is for information purposes only. Managing Values makes no representations as to accuracy, completeness, suitability, or validity of any information on this blog and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.
