Business Ethics: What is the Role of Business?

In today’s world of instantaneous reporting, and the ensuing near-instantaneous debate across social media and online comment column inches, business ethics have become not just a matter of conscience, but a make-or-break element of a business’ public image.

Reputations, if not entirely broken, can be irreparably damaged with both the public and stakeholders. Companies like Nike, Apple and Gap will forever be tainted by associations with sweatshop labor; Google’s alleged tax avoidance seem at odds with the company’s ‘don’t be evil’ mantra and may well see the search engine giant enjoy about the same level of public goodwill as bailed-out banking institutions (who still seemingly enjoy something approaching carte-blanche when it comes their business ethics); and Toyota has done itself few favors by failing to be transparent about car recalls, which were damaging enough in the first place – landing itself with a US$1.2 billion fine on top of the no-doubt far worse attrition of its turnover in the long term.

“Businesses operate in an increasingly turbulent and complex environment,” says Bidhan Parmar, a senior fellow at the Olsson Center for Applied Ethics at Darden Business School at the University of Virginia. “Stakeholders have different expectations about responsibility and fairness, and violating these expectations can have significant consequences for the business. Additionally, as an increasing number of companies operate on a global scale, they need to learn when and when not to adapt to local norms and standards. This creates challenges to building and sustaining a trusted brand in a world of change and ambiguity.”

Technology, he adds, is creating new challenges on the ethical business front, as the growing salience of big data creates issues around privacy, and the increased sophistication of data analysis facilitates potentially problematic high-speed trading.

“Generally, the key issues in business ethics in 2014 and beyond are the same issues we’ve always had,” says Joshua E Perry, assistant professor of business ethics at the Kelley School of Business at Indiana University: “financial conflicts of interest, conflicts between competing values, conflicts between competing duties, conflicts over long-term v. short-term outcomes. What is fair or just for stakeholders? What responsibilities does a firm have and to whom? What does respect for human dignity require? Trust is always an issue that business ethics is worried about, because our ability to trust each other is fundamental to our ability to do business with each other.”

To this he adds the increasingly pertinent question of sustainable business, as emergent economies led by India and China are adding to the already considerable carbon footprint of the West.

Ethical business: In conflict with the bottom line?

Of course, the question of to whom businesses are ultimately responsible is a continual challenge. The unethical practices of those companies who are named range from problematic to indefensible, but one needn’t be a committed disciple of Milton Friedman (“There is one and only one social responsibility of business…to increase its profits”) to understand that, to its stakeholders, a business’ profitability is a fairly central issue, to say the least. So, how does one resolve the not uncommon tension between ethical business and profitability?

“That is a very interesting question, and one which companies that take ethical values seriously struggle with,” reflects Philippa Foster Back (CBE), director of the UK’s Institute of Business Ethics “The important thing, though, is that boards and senior leaders at companies ask the question: ‘who does this affect, what will be the impact of our decision?’ If companies are asking the right questions, they will come to the answer which fits with their values. There are a couple of anecdotal examples of how companies thought deeply about their commitments and came to a, sometimes unpopular, decision as a result of it.”

If profit is the role of business, then so is acting ethically…

While the decisions may be unpopular, the reputational damage sustained by the aforementioned companies can be far worse – particularly if the all-important issue of trust, as raised by Perry, is compromised. Who wants, after all, to unknowingly get in a car which may or may not stop accelerating?

Looking at the big picture is therefore advisable, says Parmar – who reminds us that the intrinsic role of business is to satisfy human needs – not just for the sake of ethical practice but also for the sake of bottom line. “Businesses are an integral part of society. In order to carry out their purpose, whether it’s to catalogue the world’s information or to discover and develop new medicines to cure disease, businesses need to coordinate the interests of multiple stakeholder groups including, but not limited to, employees, customers, financiers, suppliers, and community members. These interests are connected to produce a business model that eventually produces profits. Focusing only on profits and not the underlying business model can cause leaders to make short-sighted decisions that ultimately erode their company’s ability to deliver on its purpose.”

He cites the realisations by large US retail corporations that employees’ salaries are not a cost to be cut, with any short-term gains overridden by long-term dissatisfaction and the concomitant pejoration of the customer experience.

“Keeping a robust emphasis on ethics within an organization – beyond mere regulatory or legal compliance – has a variety of potential pay-offs for the firm,” says Perry. “Kelley professor Tim Fort has written about the centrality and importance of trust within an organization and how a more holistic approach to organizational culture-building results in better working relationships and dynamics between employees and managers – which can result in the delivery of higher quality products and services.

“Of course,” he adds, “there is no denying the potential public relations value of doing the right or ethical thing as perceived by the public and industry watchdogs. The Johnson & Johnson recall of Tylenol is just one of many examples. And then there is the idea of ‘creating shared value’ developed by Porter and Kramer at Harvard, where firms are challenged to find a harmony between their corporate mission, their competitive advantage, and an area of social need. This shift from corporate social responsibility to corporate social integration is one that resonates with many of our MBA students who are motivated to graduate and create business success – but not with a zero-sum, externalized set of costs or any-means-necessary approach.”

Changing attitudes is important, reflects Foster Back, who reflects that it is important that the role of business is acknowledged from within, rather than being imposed by the public gaze. “Doing business ethically is something you do when no one is watching. Therefore it can’t be done simply for show.” She reiterates the benefits of ethical business – once again touching on the seemingly centrifugal issue of trust. “Aside from the fact one should do the right thing because it is the right thing to do, there are business benefits to ensuring that ethical values are embedded within company culture, not least reputation risk management.  So I think that there is a genuine interest, because companies are more aware that their license to operate depends upon the trust of their stakeholders (investors, customers, employees, suppliers, society at large).  And trust comes from being ethical.”

Business ethics and the MBA curriculum

So, how does this relate to business education? Business ethics has long been a part of the MBA curriculum at top schools, making students consider the role of business as well as how to enjoy success.

It is important, says Foster Back, that ethical business practice is central to the MBA curriculum, and not just an optional extra.  “The IBE would like to see business ethics as an integral part of business education, rather than as a ‘bolt-on’ module.  Better institutions realize this and do integrate the subject throughout their courses. We should be encouraging students, who after all, hope to be the business leaders of tomorrow, to consider the ethical dimensions of decision-making, whether that be marketing responsibly, sales practices, supply chain or whatever.  To that end, the IBE has an annual student essay competition, where we’re looking for best writing on business ethics.”

To this end it is important, says Parmar, that ethical business is taught as part of the MBA curriculum in an engaging manner and not just as going by the book, drawing emphasis to the benefits of ethical practice. “Ethics can also be taught in a variety of ways.  When it is taught as simply complying with the law, students can become less interested.  When ethics is taught as a course that helps students improve their ability to make complex and unstructured decisions, they see the relevance to their careers and thus are much more engaged, remember the course concepts, and use them more effectively in their work.

At Kelley, says Perry, front page news items are used as case studies – with GM’s potential failure to learn from Toyota’s lesson a current hot topic. Ethics are taught as a compulsory part of the MBA curriculum, which he believes sends out a very important message: “Having these required courses (as opposed to mere electives) also sends an implicit message to students that the subject of ethics has a shared importance alongside the other required business-content courses.”

In his view, one of the key challenges for the future will be reemphasizing the role of the individual as well as the role of business. “Ultimately the responsibility for ethical business practices must be shared among those preparing business leaders and, of course, the individual businesspersons themselves. Harvard Professor, Rakesh Khurana, has documented the social transformation of American business schools and concurrent loss of emphasis on the importance of professional responsibility. I think it’s critical that business schools reclaim this emphasis and take seriously the education of our MBAs with an eye towards not only their role as future business managers and leaders, but also as future leaders of our communities and managers of our most treasured social institutions. It is our graduates who will ultimately face the challenge of mustering the moral courage and exercising the appropriate moral judgment in their careers, but these burdens must be shared, to a certain extent, with business educators who are preparing these future decision-makers.”

Parmar agrees that responsibility lies with both the collective and the individual: “Business practitioners and business schools need to take primary responsibility for ethical business practices because they are stewards of business culture and are in the best position to connect concerns about responsibility with business operations.”

But ultimately, he concludes, the responsibility lies with all of us. “Other groups such as customers, community members, and even governments can also help business be more responsible by encouraging responsible corporate practices and fighting against unethical practices.”  

From individual, to corporation, to society as whole, ethics is far more than a buzzword in the world of business.