Business ethics need to move beyond what’s illegal

By Felix Salmon
July 18, 2012
Luigi Zingales, with the full agreement of fellow business-school professor Justin Wolfers, has an important op-ed under a provocative headline: "Do Business Schools Incubate Criminals?"

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Business school professor Luigi Zingales, with the full agreement of fellow business-school professor Justin Wolfers, has an important op-ed under a provocative headline: “Do Business Schools Incubate Criminals?”

Zingales’s point is a good one: that the way business-school students study ethics is much like the way that entomologists study ants. Quite aside from the fact that ethics courses are generally taught by relatively junior professors, they also tend to shy away from actually telling students to be ethical:

Most business schools do offer ethics classes. Yet these classes are generally divided into two categories. Some simply illustrate ethical dilemmas without taking a position on how people are expected to act. It is as if students were presented with the pros and cons of racial segregation, leaving them to decide which side they wanted to take.

Others hide behind the concept of corporate social responsibility, suggesting that social obligations rest on firms, not on individuals…

My colleague Gary Becker pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker’s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker’s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity.

At business school, there are lots of classes where students try to maximize profits; that’s nearly always considered to be the way to win in business. It’s easy to see, then, how Becker’s framing of unethical behavior as something with costs and benefits essentially strips the ethics away, leaving only a simple decision of whether the actor wants to take the risk of punishment.

And frankly the headline on Zingales’s piece makes a similar error. What it implies is that we should be worried about criminal behavior, rather than unethical behavior more generally. But I’m with Zingales: we need to go further than that.

When the economist Milton Friedman famously said the one and only responsibility of business is to increase its profits, he added “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That’s a very big caveat, and one that is not stressed nearly enough in our business schools.

Lobbying to secure a competitive advantage from the government certainly does not represent “open and free competition.” Similarly, preying on customers’ addictions or cognitive limitations constitutes deception, if not outright fraud.

There are interesting ethical debates to be had as to where to draw the line: for instance, all those “free offers” which require you to hand over your credit-card details and then bill you regularly unless you cancel. They prey on cognitive limitations, I’d say, and are less ethical than companies which don’t do that. Should business-school professors tell their students that they should avoid implementing such schemes? I don’t know. But I do think that acting ethically, even if such actions are legal and don’t maximize profits, is something that many more business-school students should be encouraged to consider.

This is a very large step, of course, from the kind of discourse which excuses illegal bribes by Walmex on the grounds that, hey, everybody does it. And in a way it’s closer to what I’m urging in a journalistic context: less emphasis on bright lines, such as what’s legal and what’s illegal, and more emphasis on acting as ethically as possible on a day-to-day basis. Treating your employees well, for instance, is sometimes good for the bottom line and sometimes bad for the bottom line. But I’m uncomfortable with arguments that urge companies to treat their employees well on the grounds that doing so will increase profits: the implication is that if it doesn’t increase profits, then the reason to do it goes away.

Zingales says that business-school professors actively foster a culture of amorality; that’s right. But the real problem isn’t business school; it’s the idea that there’s something ethically dubious about doing anything other than maximizing profits for shareholders. Which is one reason why I’m such a fan of b-corps.

28 comments

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The whole point of legislation that says what is ethical is to make things we know to be wrong legal and right. Look at Washington for a few pointers in that regard.

Posted by Potatoe1 | Report as abusive

Zingales writes that:

“True, economists are not moral philosophers, and we have no particular competence to determine what is ethical and what is not. We are, though, able to identify behavior that makes people better off.”

Notice that what he cedes with false modesty in the first sentence — “no particular competence” — he wants to take back in the second — “We are … able to identify behavior that makes people better off.”

In what sense are economists *better* “able to identify behavior that makes people better off” that warrants their current priest-like dominance in policy-making circles over & above, say, historians, sociologists, anthropologists, novelists or . . . priests?

Posted by dedalus | Report as abusive

When my dad went from engineering to small town management before retirement he said several times “if you always tell the truth, you don’t have to remember what you said”. I work at a US based global firm that gives daily reminders of ethical priorities – make a profit, but fairly, following the law, and following a lot of advice from past company leaders or founders: Win work by pleasing clients, innovating, building and using teams to best performance, being trusted. What’s strictly ‘legal’ may look pretty bad on TV news or tomorrow’s headline, so do what’s right.

I agree there seems to be a current crisis in ethics that’s showing up in business headlines, and on a national scale. In my technical work environment I’m fortunate to have a contemporary climate of ethics.

For world and national news my reference might be President Eisenhower, not perfect, but often finding restraint from strength or resolve, echoed a little in Ford, elder Bush, Carter and Reagan at times among past Presidents. An ethos or world view that placed faith in strong, fair institutions – free press, independent courts, civil servants, bipartisanship, fair play, ‘trust but verify’, etc… Another example could be the usually mis-quoted “engine Charlie” Wilson who said that he foresaw no Cabinet conflict-of-interest since he couldn’t think of a scenario where what was best for the US wouldn’t also be best for GM. On the world scale, the young UN was also seen by these as a hopeful institution for restraint, fairness and justice in the face of conflict and chaos.

The opinion piece about the “liberal west” (liberal in the traditional sense that WWII allies were fighting for a “liberal” cause) compared to modern Russia and China makes me think of this contrast: the west has put great effort into a strong framework of institutions to protect rights, secure justice and encourage our better natures, but we’re seeing ethics erode as power concentrates. We need to restore the web or bonds of ethics that help the great institutions work, once they did work well as a ‘top-down’ part of our civics and culture. The growth of the short term vs. long term view, giving in to ‘not being a sucker’ vs. doing what’s right, are trends of increasing rationalization away from simple ethics, and that may be our undoing.

Russia and China have a concentration of power in the hands of party elite, and new acquisitive and powerful forces in unfettered, chimerical “state capitalism”, but they are seeing, from the grass-roots or from dissidents who grasp ethics better than some leaders, the need to build up for the first time institutions to protect rights and rule of law.

Maybe ethical renewal will restore the west and build up the east if successfully carried from the bottom up.

Posted by Decatur | Report as abusive

Interesting topic Felix!

“They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity.”

Reminds me of the steroid issue in baseball or the old maximum daily fine issue between the EPA and the oil majors who all testified that it was cheaper to pay the fines than change their business models.

I think we’re a short time away from most of the country making an ethical vs legal choice. If the law says I’ve got to pay a 3k penalty vs a 7k health insurance premium and hospitals and doctors were bound by law to treat me and not charge interest on medical debts then you might have a few million young healthy people drop their health insurance and opt into the penalty.

Posted by y2kurtus | Report as abusive

It’s the same when people quote the famous Shakespeare line,”First thing we do is kill all the lawyers.” They neglect to say that it was remarked by a plotter of treachery.

Posted by vachon | Report as abusive

What a great piece, and great comments too. Still, take a hard look at reality, and ask – Are we just whistling into the wind, or perhaps whistling past the graveyard, on this matter of ethics?

Is it not the case the case that ‘ethical responsibility’ in the sense FS employs it in this post is as archaically passé as high-button shoes, and as limited is scope as a lost tribe in a South American jungle? James Fallows quotes a Chinese pal’s proud declaration – “Everything for myself and my friends; nothing for anyone else.” Is this not the ascendant philosophy everywhere among men? How does one observe untruths so naked they would make a Red Princeling blush being told under oath by authorities from Paulson-to-Tucker-to-Turner-to-King and conclude that it is not? But we seem to have contrived an airtight justification for our self-interests – “I am just a banker, doing God’s work (while I rip your eyes out).”

The young among us can and must believe that this descent into amorality can be arrested and then reversed. For those of an age that Curmudg and I have attained, it not so easy to hang-on to that belief.

Posted by MrRFox | Report as abusive

I’m disappointed that a professor at the University of Chicago did not feel compelled to prove that business school students are more likely than non-business school students to behave unethically. Considering that this is the main thesis of his article, it seems a rather crucial omission.

More to the point, it seems like striking naiveté to think that business school graduates that behave unethically do so because they did not realize that their behavior was unethical. Do we really believe that Anil Kumar provided inside information because he hadn’t been confronted with a Wharton case study telling him it was wrong?

I have to imagine that most people’s moral compasses are essentially defined by age 25, which is generally the earliest that someone will attend a b-school. Which is why these arguments are attacking strawmen. There is a legitimate argument against the profit-maximizing theory of corporation, but that is not what Zingales is wringing his hands over.

Posted by worm600 | Report as abusive

Thanks for the interesting piece Felix, which I appreciate, as a philosophy professor. I’m not convinced however, that telling students what to do will make them do it. It seems rather that students (who are people too) would need to make their own choices. Teachers can perhaps only give them the tools to do so. But knowledge never made anyone do the right thing. Plato argues that we need “good laws”; and Aristotle argues that we need to learn the “good habits” of following the “good laws.”

We must however, also admit that, if America has decided to normalize any non-criminal behavior (that is, allow an action not explicitly forbidden by law), then it is in the hands of legislators to limit business, to regulate and police. What we currently have, is not only a complete failure of economics–but an absolute failure of politics. America loves the wild west myth (although it serves only a small number of individual interests) and has translated it into business terms. Too bad politicians aren’t willing or able to do the job of sheriff. Maybe it is because they are in bed with the corporate criminals.

And at the end of the day, do we not need to ask whether business as a whole is ethical? If seeking profit can be ethically accomplished? Or is business (at least in its capitalist form) not inherently unethical? If so, then teaching business students ethics is an oxymoron.

Posted by JustJustin | Report as abusive

“Acting as ethically as possible”…
I think this is an incredibly tough step change in attitude that will probably never happen.

Un-ethical behaviour is absolutely rife in any for-profit organisation.
Particularly with regard to any company dealing with non-sophisticated retail customers.

In fact – I would go further. I think profit maximisation DEMANDS unethical behaviour.
Any salesman or purchasing manager has an extremely loose relationship with “the truth”.
That’s how they get more sales than the other guy and negotiate the best prices.

Take some everyday examples: car salesmen and advertising.

Ethically it is the right thing to do NOT to load up a car with a bunch of worthless extras with astronomical margins (metallic paint/sat nav/gap insurance) by claiming “everyone takes it” or “you can’t resell the car without it”.

Ethically you should advertise with a picture of a REAL Big Mac or a de-odourant with some fat smelly bloke.
Perhaps the University of Phoenix could show average debt vs. unemployment for their “university” versus others.

It’s all a big con.
And that isn’t going to change any time soon.

That’s why we have to have laws.

Posted by TinyTim1 | Report as abusive

Simple ethics: if everyone wins, it’s ethical, if what you do hurts someone, it’s unethical.

Posted by FifthDecade | Report as abusive

Decatur, your words made my day.

Posted by Curmudgeon | Report as abusive

I hate to say this but by the time these kids have hit business school you have already lost most of them.

We live in an “ends justify any means world”. When things get tough, the first thing suspended is the rule of law. We have seen this in action everywhere over the last 12 years.

This article from the NY Times got me thinking http://www.nytimes.com/2012/06/10/educat ion/seeking-academic-edge-teenagers-abus e-stimulants.html?pagewanted=all, about how kids are explicitly being told it is okay to cheat to get into the right collage. Their parents look the other way, and their peer group are all doing the same thing so they don’t “lose their edge”.

So you are telling me after cheating since grade 10 to get into the “right collage”, so they can get the “right job” at Goldman, that all the sudden these now young adults are going to start observing moral lines. All of the sudden they are going to ignore “the edge” their peer group has.

It doesn’t matter what biz school teaches these kids with regard to ethics. They have been told for so long that they are special, that it is okay to cheat if everyone is doing it and that it is necessary to keep the playing field level, that a biz school course in ethics is something to pass, not to incorporate into ones world view.

Posted by lucy36 | Report as abusive

+1 Decatur

@lucy, there are still plenty of kids growing up with a strong moral foundation. But most of them choose careers through which they can contribute to society, rather than careers designed first and foremost for self-enrichment.

@worm, we have traditionally embraced a Judeo/Christian religious basis for a code of ethics. But these days that is not politically correct, so instruction in ethics has shifted to asking questions without offering answers.

There is a working secular basis for ethics, but it relies on the concept of “societal good” (perhaps reinforced by the concept of “social contract”). Hard to push that against a mindset of rampant individualism.

Posted by TFF | Report as abusive

@CDN_Rebel, you forget “Love thy neighbor?” Will refrain from comment on the rest of your hateful bigotry, because you clearly don’t have a clue what you are talking about.

Society is increasingly secular. I understand this and was not suggesting that we ought to somehow try to reverse this. Yet absent religious law, what is the basis for ethics? What basis CAN we develop in a secular society?

“Global humanism” will work, if you mean what I think you mean. But the emphasis needs to be on “global” rather than “individual”. You cannot build a workable system of ethics around the concept, “Give me mine and **** the rest of you.” And unfortunately, that is where the American center is today.

Posted by TFF | Report as abusive

A thoughtful and timely article, Felix. I also appreciate the quality and thoughtfulness of the comments it has provoked.

I have three perspectives to share which I hope can help inform and stimulate the conversation about this important subject.

The first is a perspective from someone who has taught and done research in business ethics at a business school which really cares about and promotes the centrality of ethics in the business curriculum and community.

The second perspective is that of a former commercial litigation lawyer who changed career direction to try to help companies focus more proactively on ethics and values as well as their legal obligations.

The final perspective is that of someone now working for an organization that has conducted global research with nearly 40,000 people which shows why companies, their employees and other stakeholders, and society as a whole are all better off when businesses focus on HOW they do what they do, not simply on achieving the goals themselves.

To the first point, from my time on staff at the Center for Business Ethics at Bentley University I can vouch for level of student engagement and the teaching effectiveness of integrating ethics throughout the entire business curriculum, as opposed to delivering stand-alone instruction. For many years (certainly long before Enron and all the scandals that have followed), Bentley professors from the various business disciplines have participated in an in-depth week-long program that gives them the knowledge, capabilities, and tools to educate students about the ethical dimensions of business issues, decisions and behaviors within the specific context of each discipline. This not only raises ethical awareness and enhances skills in ethical reasoning and decision making,it helps shape leaders who can cultivate robust ethical cultures within their organizations while being sensitive and proactive with regard to the broader responsibilities of business in society.

The second perspective reinforces my view that, over the past 10 years, doing more than you are legally required has become an essential component of demonstrating to investors, regulators, customers and the public that you are a trustworthy business and worthy of retaining your license to operate. The increasing value of a relational, as opposed to merely transactional, approach to doing business is becoming increasingly recognized. Michael Porter at Harvard Business School — of all places — has shown by his concept of shared value that business does not have to be a zero-sum game.

Finally, I offer the point of view that we need to go beyond the compliance and risk management mindset not just because it’s good for business or, more importantly, because it’s the right thing to do — no, we have to do it because what’s at stake is nothing less than the sustainability of business itself — now the world’s primary engine of value, wealth and social wellbeing. In the interests of full disclosure, I should mention that I work for a company, LRN Corporation, whose mission is premised on the idea of inspiring “principled performance.” Ensuring that companies and their employees comply with the laws that apply to them globally is critical, but insufficient. Of particular importance is the role of trust, company purpose and core values as they harmonize with leadership and governance systems to help define unique corporate cultures. Our research — published in “The HOW Report” — shows that corporate culture is a critical determinant of behaviors (ethical or otherwise) and is capable of being measured, analyzed and influenced in a strategic way. Furthermore, we now have hard and compelling data from 18 countries on how governance, culture and leadership impact business performance.

Posted by How_Matters | Report as abusive

You can shear a sheep many times, but butcher it only once. When business schools teach that lesson, stewardship not pillaging, then the circle will turn…for awhile.

In the meantime my employees are gold, our customers and vendors are our friends, and all will be treated fairly and with respect on my watch. That’s just good business.

Good article Felix, thank you.

Posted by CaptnCrunch | Report as abusive

@CaptnCrunch

After 20 years of watching the sheep slaughter in civil service, I’m ready for a great company. Got openings?

I’ve observed all levels of government treating people as expendable and easily replaceable; with management behavior only getting worse in these economic woes.

Keep an eye on Florida industry. You’re likely to see a revival of labor unions in the next few years because the private industry insists on viewing employees as liabilities instead of their greatest asset.

Take care of your people and they will take care of you. This concept applies to customers and employees. A little off topic, but if people focused on taking care of people first and how fat their wallet is second the latter would take care of itself, and we wouldn’t be having this conversation about ethics.

Good luck in calibrating societies moral compass. Glad to see someone is trying. Not really sure what good ethics look like anymore; at least around central Florida.

Posted by Sparrow_67 | Report as abusive

@TFF “Love thy neighbor” is not Judeo-Christian. It’s pure New Testament juice, so scratch the first part of Judeo-Christian and its applicability is rather limited anyway. It’s not a particularly good maxim to base one’s life upon.

Posted by Frwip | Report as abusive

@Frwip, I beg to differ, but that is beside the point…

Our society has moved beyond those roots, and needs a basis for ethics that does NOT depend on a particular religious tradition. Global humanism might suffice, but instead we see educators shying away from the matter entirely. And unfettered individualism won’t cut it.

As “How Matters” writes, ethics needs to be taught from an early age, and integrated with the rest of the curriculum. Ask students repeatedly, “How do your choices affect the class? How do your choices affect your community? How do they affect broader society?” Perhaps eventually they will begin to ask themselves that?

Posted by TFF | Report as abusive

@TFF “Love thy neighbour” is just Christianity’s version of The Golden Rule and is hardly original!

Although I wholeheartedly disagree with Frwip that it is not a good maxim.

It should be the only maxim.

Posted by TinyTim1 | Report as abusive

@TinyTim, CDN suggested that Christianity contains no ethical code beyond “do not steal/kill”, which is why I responded as I did. “Love your neighbor, as you love yourself” is an easy counterexample.

Moreover, as you point out, it predates Christianity in all traditions INCLUDING Judaism, with references in the Old Testament and Talmud.

http://en.wikipedia.org/wiki/Golden_Rule

You could even argue that it is the essential guiding principle of “global humanism”, at least as I understand the concept. And to bring it back to the original topic, it would suffice as a basis for business ethics.

Is that too much freight to load onto a simple one-sentence concept?

Posted by TFF | Report as abusive

The problem with the golden rule in business is that every profit maximiser expects everyone else also to be a profit maximiser and hence justifies his actions by appealing to a level playing field in competition.

In other words, as a profit maximiser I use mis-leading/confusing commercials/pricing structures or whatever. Since I am highly sophisticated in the world of pricing structures I expect the same to happen to me whenever I am on the receiving end.

Therefore, I do unto others what I am happy to have done to me.

What we need is a little Rawls thrown in there.
http://en.wikipedia.org/wiki/Veil_of_ign orance
We need to protect the weakest and most vulnerable in our society.
So it needs to be the case that retail investors for example can’t buy highly complex derivatives.

Again, with the rules/laws.

Posted by TinyTim1 | Report as abusive

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