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

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

A Jilted Generation?

Oh, how I wanted to hate this book.* That grating note of injured victimhood: the very title sets your teeth on edge. Yet another attack on the baby boomers. As if it was their fault they were born in the explosion of fertility that followed the most horrific war in history – in which many of them lost family and almost everyone someone or something precious. As for the optimistic aspirations of the 1960s – at least they had some. And guilt at having (eventually) bought houses and signed up (the lucky ones) for pensions? Grow up, get a life, get a job!

By the time I finished Ed Howker and Shiv Malik’s book, I was still boiling – but not at them. I still think the baby boomer angle is sensationalist and unhelpful: generations are too slippery to be useful units of analysis, let alone blame (as one cross friend said to me on his 46th birthday: ‘What about us? Our parents are going to live to 100, and our kids are still at home because they can’t get jobs or houses!’).

Above all aiming at their grandparents deflects attention from the real culprit – which the thrust of their case makes abundantly clear. What they eloquently trace is the consequences of a breathtakingly foolhardy 30-year (not 60-year) experiment in dismantling the state and individualising responsibility that has led straight to the debt crisis we face today.

As the authors note, this was a deliberate political project. Dazzled by the hard-edged arguments of Chicago monetarists, Margaret Thatcher (who hated the baby boomers) and co-ideologues in subsequent governments acted out the belief that the state wasn’t just inefficient: it was hostile to the individual. In this view, public service was an oxymoron, public employees of all kinds pursuing their own interests at the expense of those of citizens (think Yes, Minister). Since the latter could be relied on to know what they wanted, the argument ran, let’s get rid of the former and allow the marketplace – an instant information processor, in contrast to the hopelessly clumsy proceses of democracy – to coordinate needs and provision without bureaucratic interference. Even better: since markets are efficient and tastes constant, there was little need to plan for the future at all!

In a wealth of charts and tables, Howker and Malik lay out the price of this institutionalised short-termism for three things that matter most to young adults: jobs, housing and inheritance. These chapters are urgent, surprising and enraging. They show how at every turn human beings pirouette around rigid economic theory as effortlessly as foreign footballers past dim English defenders. In housing, they demonstrate how the great council-house sell-off and deregulation have bequeathed us a housing stock and tenancy regime (respectively poky, expensive and insecure) that meet the needs of buy-to-let investors but not those of young adults wanting a home. In jobs, the dropping of full employment as a political goal has been just as counterproductive. Far from being a consequence of Labour welfarism, the ‘benefits explosion’ that George Osborne is now trying to rein in is the direct result of Thatcherite deregulation – the counterpart to rising unemployment and, even more striking, a race to the bottom in employment in which more and jobs, particularly for young people, are so badly paid that they have to be supplemented by handouts from the state. Subsidising skinflint employers now accounts for a large part of the £90bn benefits budget.

As the book shows, abandoning collective responsibility for the future had other dire consequences, notably the crumbling of the apprenticeship system and the casual shrugging off, still proceeding, of pension obligations (let alone career). Free university education went the same way. Paradoxically, Conservative and New Labour governments that lectured the 1960s generation so sternly about living within today’s means were being as profligate with tomorrow’s as a flash City trader on his third bottle of Bolly. Unlike Norway, which quaintly funnelled North Sea oil revenue into a sovereign wealth fund for collective benefit, we blew it. Likewise the £60 bn proceeds of privatisation. And no, as our authors point out, the unleashed private sector proved no better at investment than the public, chief executives quickly twigging that the simplest way to win City kudos (and lavish bonuses) was to slash investment, research and jobs. Meanwhile, like a desperate gambler, governments have thrown around off-balance-sheet IOUs like confetti. Through the PFI, capital projects worth £56bn will end up costing £267bn.

Labour Treasury chief secretary Liam Byrne’s cheeky note to his coalition successor that the cupboard was bare was no joke. There’s nothing left to sell or pawn. Howker and Malik are right to dig through that flippancy to expose how successive governments have bet (and lost) the farm on a barren economic formula. This month’s savage cuts are payback not just for bankers, but for three decades of voodoo economics. We should applaud their forensic skill in exposing the rarely discussed assumptions than have led us where we are, and in setting out the consequences in concrete terms. Perhaps not surprisingly, they are less convincing in putting forward remedies, however. It will certainly take more than the mild doses of social enterprise and employee ownership that the authors suggest.

Yet it defies belief that that a nation with Britain’s resources should be going backwards in terms of simple basics that matter most to most people. To change that, it’s not the fringe manifestations of capitalism that have to shift, but the brutal and unrealistic economic credo at its heart. Putting forward a political programme that does that is the real challenge for the jilted generation – and one that the baby boomers, forgiving the brickbats, will support all the way.

* Jilted Generation: How Britain has Bankrupted its Youth, Ed Howker and Shiv Mali, Icon Books: London 2010