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There's no such thing as an ethical business. Discuss

Wed, 15th Dec 2010

Of course there’s such thing as an ethical business. There are plenty of organisations that have at their heart the idea that business is not just a vehicle for making profits but a force for the broader good: John Lewis and the coops, social enterprises, Fairtrade firms; even in the US there are companies like Whole Foods Markets, 7th Generation and others that as well as believing wholeheartedly in capitalism believe in doing the right thing too.

Lots of these companies are extremely successful too (although that’s not and shouldn’t be the rationale for being ethical. Remember the saying of Archbishop Whateley: ‘Honesty is the best policy. But he who says so is not an honest man’). And why shouldn’t they be successful? The truth, I’ve come to believe, is that it’s not what you know (or think you know) about business that’s crucial to business success: it’s knowing what you believe in and what you want to do strongly enough to make your own rules – and that includes being ethical or indeed being non-ethical.

So how come the myth has grown up that business can’t be ethical? Put crudely, in the 1970s-1980s there was an ideological hijack of the business orthodoxy by an unlikely and opportunistic alliance of corporate raiders and business schools. Each had their own reasons for formulating a kind of free-market fundamentalism to which the returns have steadily declined and now turned negative, as witness the series of scandals that culminated in 2008 in the banking crisis – which, let me remind you, was the result not of impersonal economic forces but mistaken, venal, greed-motivated decisions by human beings, managers, at the top of large financial firms.

Of course, there has always been a tension between what you might call a light side and a dark side of business: Quakers on one hand, robber barons on the other. But it is only in the last 30 years that a single dogmatic orthodoxy has hogged all the speaking roles, drowned out the counter-examples that I’ve mentioned above and turned business officially and explicity into a morals-free zone. That orthodoxy is the doctrine that the purpose of business is maximising returns to shareholders. After some initial resistance, the original gang of two promoters was quickly joined by top managers who instantly saw that far from being a threat managing for shareholder value could be very much in their interests too. Articulated by three powerful interest groups, the mantra ‘no ethics please, we’re businessmen’ was locked in place by corporate governance codes for which by the way there is no empirical evidence that I know of that they make business more successful and some that they make it worse.

As we have experienced, morals-free business is a disaster – but it’s also based on an egregious legal fallacy. It turns out – I’m quoting here – ‘[after a systematic analysis of a century’s worth of legal theory and precedent] that the law [is] surprisingly clear [...]. Shareholders do not own the corporation, which is an autonomous legal person. What’s more, even when directors go against shareholder wishes […] courts side with directors the vast majority of the time...

‘And yet, in a 2007 article in the Journal of Business Ethics, 31/34 directors surveyed... said they’d cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximise shareholder wealth, they believed it was their duty to do so.’

This, says the article I’m quoting from, is plain wrong. Directors are being taught the wrong things, with the result that they simply don’t know what their legal duties are. Hence the tragic irony of innovative, proudly ethical Quaker companies like Cadbury, which campaigned against slavery and alcoholism and food adulteration, and Friends’ Provident and Barclays – did you know Barclays was orginally Quaker? – setting aside their ethical principles in the mistaken belief that they have to privilege stockholders above all the rest, and suffering the terrible consequences that we’ve seen.

Now a test: where do you think the text that I quoted comes from? No, not Marxism Today or New Left Review, or even the Observer. It appeared in that revolutionary organ Harvard Business Review – and while that sinks in, consider something else that I read in HBR a couple of months later: shareholders have not done better under shareholder capitalism, in fact they have done worse, than they did in the previous three decades from the end of the war to the late 1970s when managers and directors commonly believed they owed something to employees and society as a whole, not just the stockholders.

There are plenty of reasons for that, and I won’t elaborate on them here. But the point is that there’s no argument even in shareholder capitalism’s own terms for not behaving ethically; and very many arguments for, the biggest one being that if capitalism isn’t underpinned by an internal commitment to bettering society rather than just oneself then no amount of external regulation will prevent more and worse crashes in the future, and this one’s quite bad enough, thank you. Let me end with a quote from Peter Drucker, as relevant now as when he wrote it in 1954: ‘Free enterprise cannot be justified as being good for business. It can be justified only as being good for society’.

Text of a talk given at The Foundation on 29 November 2010
 


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