Doing well by doing good
Apr 22nd 2000
From The Economist print edition
Anti-globalisation protesters see companies as unethical as well as exploitative. Firms demur, of course, but face an awkward question: Does virtue pay?
TO MANY people the very concepts of business and ethics sit uneasily together. Business ethics, to them, is an oxymoronor, as an American journalist once put it, a contradiction in terms, like jumbo shrimp. And yet, in America and other western countries, companies increasingly wonder what constitutes ethical corporate behaviour, and how to get their employees to observe it. Management schools teach courses on the subject to their students. Business ethics is suddenly all the rage.
Fashionable perhapsbut also vague. Protesters in Washington, DC, were this week railing against corporate immorality as well as the IMF. But plenty of people retort that companies should not be in the business of ethics at alllet alone worrying about social responsibility, morals or the environment. If society wants companies to put any of these ahead of the pursuit of shareholder value, then governments should regulate them accordingly. Thirty years ago Milton Friedman, doyen of market economics, summed up this view by arguing that there is one and only one social responsibility of businessto use its resources and engage in activities designed to increase its profits.
Even those who think companies do have wider responsibilities argue about the best way to pursue them. Ulrich Steger, who teaches environmental management at the International Institute for Management Development in Lausanne, says that companies cannot possibly hope to pursue a single abstract set of ethical principles and should not try. No universal set of ethical principles exists; most are too woolly to be helpful; and the decisions that companies face every day rarely present themselves as ethics versus economics in any case. He says that companies should aim instead for responsible shareholder-value optimisation: their first priority should be shareholders long-term interests, but, within that constraint, they should seek to meet whatever social or environmental goals the public expects of them.
Certainly companies, which increasingly try to include their ethical principles in corporate codes, stumble over how to write in something about the need for profitability. Or, to put the dilemma more crudely: when money and morality clash, what should a company do? Most firms try to resolve this with the consoling belief that such clashes are more imagined than real, and that virtue will pay in the end. Yet they cannot always be right.
Indeed, companies face more ethical quandaries than ever before. Technological change brings new debates, on issues ranging from genetically modified organisms to privacy on the Internet. Globalisation brings companies into contact with other countries that do business by different rules. Competitive pressures force firms to treat their staff in ways that depart from past practice. Add unprecedented scrutiny from outside, led by non-governmental organisations (NGOs), and it is not surprising that dealing with ethical issues has become part of every managers job.
Dont lie, dont cheat, dont steal
In America, companies have a special incentive to pursue virtue: the desire to avoid legal penalties. The first attempts to build ethical principles into the corporate bureaucracy began in the defence industry in the mid-1980s, a time when the business was awash with kickbacks and $500 screwdrivers. The first corporate-ethics office was created in 1985 by General Dynamics, which was being investigated by the government for pricing scams. Under pressure from the Defence Department, a group of 60 or so defence companies then launched an initiative to set up guidelines and compliance programmes. In 1991, federal sentencing rules extended the incentive to other industries: judges were empowered to reduce fines in cases involving companies that had rules in place to promote ethical behaviour, and to increase them for those that did not.
But the law is not the only motivator. Fear of embarrassment at the hands of NGOs and the media has given business ethics an even bigger push. Companies have learnt the hard way that they live in a CNN world, in which bad behaviour in one country can be seized on by local campaigners and beamed on the evening television news to customers back home. As non-governmental groups vie with each other for publicity and membership, big companies are especially vulnerable to hostile campaigns.
One victim was Shell, which in 1995 suffered two blows to its reputation: one from its attempted disposal of the Brent Spar oil rig in the North Sea, and the other over the companys failure to oppose the Nigerian governments execution of Ken Saro-Wiwa, a human-rights activist in a part of Nigeria where Shell had extensive operations. Since then, Shell has rewritten its business principles, created an elaborate mechanism to implement them, and worked harder to improve its relations with NGOs.
Remarkably, Shells efforts had no clear legal or financial pressure behind them. Neither of the 1995 rows, says Robin Aram, the man in charge of Shells policy development, did lasting damage to the companys share price or salesalthough the Brent Spar spat brought a brief dip in its market share in Germany, thanks to a consumer boycott. But, he adds, we werent confident that there would be no long-term impact, given the growing interest of the investment community in these softer issues. And he also concedes that there was a sense of deep discomfort from our own people. People seem happier working for organisations they regard as ethical. In a booming jobs market, that can become a powerful incentive to do the right thing.
The quest for virtue
In America there is now a veritable ethics industry, complete with consultancies, conferences, journals and corporate conscience awards. Accountancy firms such as PricewaterhouseCoopers offer to audit the ethical performance of companies. Corporate-ethics officers, who barely existed a decade ago, have become de rigueur, at least for big companies. The Ethics Officer Association, which began with a dozen members in 1992, has 650 today. As many as one in five big firms has a full-time office devoted to the subject. Some are mighty empires: at United Technologies, for example, Pat Gnazzo presides over an international network of 160 business-ethics officers who distribute a code of ethics, in 24 languages, to people who work for this defence and engineering giant all round the world.
For academic philosophers, once lonely and contemplative creatures, the business ethics boom has been a bonanza. They are employed by companies to run ethics workshops and are consulted on thorny moral questions. They also act as expert witnesses in civil lawsuits where lawyers usually want to be able to tell the judge that their clients behaviour was reasonable. So you are usually working for the defendants. They want absolution, says Kirk Hanson, a professor at Stanford Business School.
Outside America, few companies have an ethics bureaucracy. To some extent, observes IMDs Mr Steger, this reflects the fact that the state and organised labour both still play a bigger part in corporate life. In Germany, for example, workers councils often deal with issues such as sexual equality, race relations and workers rights, all of which might be seen as ethical issues in America.
In developing a formal ethics policy, companies usually begin by trying to sum up their philosophy in a code. That alone can raise awkward questions. The chairman of a large British firm recalls how his company secretary (general counsel) decided to draft an ethics code with appropriately lofty standards. You do realise, said the chairman, that if we publish this, we will be expected to follow it. Otherwise our staff and customers may ask questions. Dismayed, the lawyer went off to produce something more closely attuned to reality.
Not surprisingly, codes are often too broad to capture the ethical issues that actually confront companies, which range from handling their own staff to big global questions of policy on the environment, bribery and human rights. Some companies use the Internet to try to add precision to general injunctions. Boeing, for instance, tries to guide staff through the whole gamut of moral quandaries, offering an online quiz (with answers) on how to deal with everything from staff who fiddle their expenses on business trips to suppliers who ask for kickbacks.
The best corporate codes, says Robert Solomon of the University of Texas, are those that describe the way everybody in the company already behaves and feels. The worst are those where senior executives mandate a list of principlesespecially if they then fail to walk the talk themselves. However, he says, companies debate their values for many months, but they always turn out to have similar lists. There is usually something about integrity; something about respect for the individual; and something about honouring the customer.
The ethical issues that actually create most problems in companies often seem rather mundane to outsiders. Such as? When an individual who is a wonderful producer and brings in multiple dollars doesnt adhere to the companys values, suggests Mr Gnazzo of United Technologies: in other words, when a company has to decide whether to sack an employee who is productive but naughty. When an employee who you know is about to be let go is buying a new house, and youre honour-bound not to say anything, says Mr Solomon. Or, what do you do when your boss lies to you? Thats a big one.
Issues such as trust and human relations become harder to handle as companies intrude into the lives of their employees. A company with thousands of employees in South-East Asia has been firing employees who have AIDS, but giving them no explanation. It now wonders whether this is ethical. Several companies in America scan their employees e-mail for unpleasant or disloyal material, or test them to see if they have been taking drugs. Is that right?
Even more complicated are issues driven by conflicts of interest. Edward Petry, head of the Ethics Officer Association, says the most recent issue taxing his members comes from the fad for Internet flotations. If a company is spinning off a booming e-commerce division, which employees should be allowed on to the lucrative friends-and-family list of share buyers?
Indeed, the revolution in communications technologies has created all sorts of new ethical dilemmasjust as technological change in medicine spurred interest in medical ethics in the 1970s. Because it is mainly businesses that develop and spread new technologies, businesses also tend to face the first questions about how to use them. So companies stumble into such questions as data protection and customer privacy. They know more than ever before about their customers tastes, but few have a clear view on what uses of that knowledge are unethical.
Foreigners are different
Some of the most publicised debates about corporate ethics have been driven by globalisation. When companies operate abroad, they run up against all sorts of new moral issues. And one big problem is that ethical standards differ among countries.
Reams of research, says Denis Collins in an article for the Journal of Business Ethics, have been devoted to comparing ethical sensitivities of people from different countries. As most of this work has been North American, it is perhaps not surprising that it concluded that American business people are more ethically sensitive than their counterparts from Greece, Hong Kong, Taiwan, New Zealand, Ukraine and Britain. They were more sensitive than Australians about lavish entertainment and conflicts of interest; than French and Germans over corporate social responsibility; than Chinese in matters of bribery and confidential information; and than Singaporeans on software piracy. Given such moral superiority, it is surprising that American companies seem to turn up in ethical scandals at least as often as those from other rich countries.
Many companies first confronted the moral dilemmas of globalisation when they had to decide whether to meet only local environmental standards, even if these were lower than ones back home. This debate came to public attention with the Bhopal disaster in 1984, when an explosion at a Union Carbide plant in India killed at least 8,000 people. Most large multinationals now have global minimum standards for health, safety and the environment.
These may, however, be hard to enforce. BP Amoco describes in a recent environmental and social report a huge joint venture in inland China. Concerns remain around the cultural and regulatory differences in risk assessment and open reporting of safety incidents, the report admits. For instance, deference to older and more senior members of staff has occasionally inhibited open challenging of unsafe practices. BP Amoco thinks it better to stay in the venture and try to raise standards. But Shell claims to have withdrawn from one joint venture because it was dissatisfied with its partners approach. Most companies rarely talk about these cases, creating the suspicion that such withdrawals are rare.
Bribery and corruption have also been thorny issues. American companies have been bound since 1977 by the Foreign Corrupt Practices Act. Now all OECD countries have agreed to a convention to end bribery. But many companies turn a blind eye when intermediaries make such payments. Only a few, such as Motorola, have accounting systems that try to spot kickbacks by noting differences between what the customer pays and what a vendor receives.
Some corruption is inevitable, say companies such as Shell, which work in some of the worlds nastiest places. If someone sticks a Kalashnikov through the window of your car and asks for 20 naira, we dont say that you shouldnt pay, says Mr Aram. We say, it should be recorded. United Technologies Mr Gnazzo takes a similar view: We say, employees must report a gift so that everybody can see its a gift to the company, and we can choose to refuse it. Every year we write to vendors, saying that we dont want gifts, we want good service.
Rights and wrongs
Human rights are a newer and trickier problem. Shell has written a primer on the subject, in consultation with Amnesty International. It agonises over such issues as what companies should do if they have a large investment in a country where human rights deteriorate; and whether companies should operate in countries that forbid outsiders to scrutinise their record on human rights (yes, but only if the company takes no advantage of such secrecy and is a force for good).
The force-for-good argument also crops up when companies are accused of underpaying workers in poor countries, or of using suppliers who underpay. Such problems arise more often when there are lots of small suppliers. At Nike, a sporting-goods firm, Dusty Kidd, director of labour practices, has to deal with almost 600 supplier-factories around the world. The relationship is delicate: They are independent businesses, but we take responsibility, says Mr Kidd. When, last year, Nike insisted on a rise in the minimum wage paid by its Indonesian suppliers, it claims to have absorbed much of the cost.
NGOs have berated firms such as Nike for failing to ensure that workers are paid a living wage. But that can be hard, even in America. I once asked a university president, do you pay a living wage on your campus? recalls Mr Kidd. He said that was different. But it isnt. In developing countries, the dilemma may be even greater: In Vietnam, our workers are paid more than doctors. Whats the social cost if a doctor leaves his practice and goes to work for us? Thats starting to happen.
Stung by attacks on their behaviour in the past, companies such as Shell and Nike have begun to see it as part of their corporate mission to raise standards not just within their company, but in the countries where they work. Mr Kidd, for instance, would like Nikes factories to be places where workers health actually improves, through better education and care, and where the status of women is raised. Such ideals would have sounded familiar to some businessmen of the 19th century: Quaker companies such as Cadbury and Rowntree, for instance, were founded on the principle that a company should improve its workers health and education. In todays more cynical and competitive world, though, corporate virtue no longer seems a goal in its own right.
When, in the late 1980s, companies devoted lots of effort to worrying about the environment, they told themselves that being clean and green was also a route to being profitable. In the same way, they now hope that virtue will bring financial, as well as spiritual, rewards. Environmental controls can, for instance, often be installed more cheaply than companies expect. Ed Freeman, who teaches ethics at the Darden Business School at the University of Virginia, recalls how the senior executive of a big chemical company announced that he wanted zero pollution. His engineers were horrified. Three weeks later, they returned to admit that they could end pollution and save money. The conflict between ethics and business may be a lot less than we think, he argues.
Most academic studies of the association between responsible corporate ethics and profitability suggest that the two will often go together. Researchers have managed to show that more ethically sensitive sales staff perform better (at least in America; the opposite appears to be the case in Taiwan); that share prices decline after reports of unethical conduct; and that companies which state an ethical commitment to stakeholders in their annual reports do better financially. But proving a causal link is well-nigh impossible.
What of the growing band of ethical investors? I dont know of a single one of these funds which looks at the effectiveness of a companys internal ethics programme, says the EOAs Mr Petry, sadly. So a defence firm scores bad marks for being in a nasty industry, but no offsetting good marks for having an elaborate compliance programme.
And then there is the impact on employees. It may be true that they like working for ethically responsible companies. But, says Stanfords Mr Hanson, I see a lot of my graduate students leaving jobs in not-for-profits to go and work for dot.coms. Few dot.coms would know a corporate ethics code if it fell on their heads. Small firms, in particular, pay far less attention than bigger rivals to normalising ethical issues and to worrying about their social responsibilities. Yet employment is growing in small companies and falling in big ones.
There may still be two good reasons for companies to worry about their ethical reputation. One is anticipation: bad behaviour, once it stirs up a public fuss, may provoke legislation that companies will find more irksome than self-restraint. The other, more crucial, is trust. A company that is not trusted by its employees, partners and customers will suffer. In an electronic world, where businesses are geographically far from their customers, a reputation for trust may become even more important. Ultimately, though, companies may have to accept that virtue is sometimes its own reward. One of the eternal truths of morality has been that the bad do not always do badly and the good do not always do well.