Posts tagged business ethics

Column on Business versus Business

Business Versus Business

Tibor R. Machan

One can think of business as a profession, like medicine or engineering, and ask whether it is worthwhile or valuable. Should people in their communities welcome business or not? Or one can think of business as the collection of commercial institutions, such as the banks, corporations, shops, and so forth that are active in one’s community.

It is one thing to oppose the former, quite another to be critical of the latter. One may well find business valuable as an institution in a human community, something to be embraced and supported, even as one considers the great majority of existing businesses guilty of innumerable types of malpractice. The same can be so with any other endeavor, such as medicine or entertainment or farming. While as properly understood all of those could be assets in a human community, their actual manifestation at any period of time could also be highly lamentable.

In America, just as elsewhere in the world, it is arguable that too many businesses are engaged in malpractice even while the institution of business, sans the malpractice, is something very much to be prized and in considerable need. The malpractice I am referring to involves mainly getting into bed with politicians and bureaucrats whereby too many businesses are actually attempting to subvert the very nature of their profession. These outfits run to Washington and other centers of political power to gain favor against their domestic and foreign competitors and thus flagrantly betray the institution of business. Of course this is not too difficult to understand, even to excuse, given that government has become thoroughly corrupt by involving itself by picking winners and losers, in favoring various businesses and disfavoring others, with special legislation, regulation and other policies that undermine free and open competition in the market place.

Consider as an analogy professional sports. If the organizations that administers the rules of a given sport were to have established as a routine practice favoring certain teams over others, if referees and umpires took bribes as a matter of course, it would be no surprise that the various teams would try to outdo each other with their offer of bribes to these officials. Or if a judge in some criminal jurisdiction established a record of corruptibility, it would be no surprise if litigants tried to approach their case not with good arguments, not with facility with the law but by way of coming up with the most attractive bribe for the judge. Those making use of bribes would, of course, be complicit in the corruption of the system but the main fault would lie with those in the administration who make a practice of selling out, of in effect betraying their oath of office.

When Bill Gates’s Microsoft Corporation was being hounded by the Department of Justice for allegedly violating antitrust laws–supposedly by means, for example, of bundling its products, something that should never be deemed objectionable let alone illegal–he was reportedly advised that his practice of staying away from Washington, of refusing to fund politicians running for election, was the source of how he was being treated. In time Gates learned his lesson and began to game the system. Instead of remaining independent of politics and relying mainly on technological and market savvy, he followed the practices of his competitors by supporting politicians of both major parties running for office. By now, of course, Microsoft Corporation is there with all the others who take part in what some call crony capitalism or what is simply the corruption of capitalism. (If the sport of tennis were administrated similarly, would we call it crony tennis or simply corrupt tennis?)

One can be an enthusiastic supporter of business as an upstanding institution in a human community but at the same time be vehemently critical of how actual firms are being managed vis-a-vis their ties with politics. But the main source of the problem is how the system of government in a society makes it not just possible but nearly imperative for people in business to become corrupt so as to be able to survive and prosper.

To Whom Is a Business Manager Morally Responsible?

Over the last several decades the field of business ethics has become very popular in colleges and universities, including business schools, around the world. Actually, other professional ethics courses have also gained entry into the medical, legal, engineering, and other curriculums. (Oddly, though, the ethics of education and scholarship have not joined this trend!)

In the field of business ethics the focus has tended to be on what has come to be called the theory of Corporate Social Responsibility (CSR). This view takes it as a given, not in need of a lot of argument, that what corporations ought to do, first and foremost, is to benefit society and not those who own the firm. One explanation of this focus is that in the field of economics, which is regarded a social science, it is widely accepted that what corporate managers will do—not so much what they ought to do—is to improve the company’s bottom line.

Back in 1970 the late Milton Friedman did write a widely reprinted article for The New York Times Magazine, “The Social Responsibility of Business Is to Increase its Profits,” insisting that the moral responsibility of corporate managers is to strive to make the company profitable. Up until that time it was simply taken for granted that this is what corporate mangers would be doing—this follows from the general assumption in economics that in the marketplace everyone embarks upon the maximization of utilities, which is pretty much the same thing as trying to make a profit. But Friedman changed the account somewhat by claiming that this is not only what corporate managers do but it is also what they are morally obliged to do. Why? Because that is what they promised to do to the company’s shareholders and investors.

In response to Friedman a great many people who came from the field of philosophical ethics began to write extensively about business ethics and insisted that, on the contrary, what corporate managers ought to do is to manage companies so they would benefit stakeholders. In other words, the moral responsibility of corporate managers is not to improve the bottom line but to help all those who could benefit from what the company is doing, all those who have a stake in the company’s fortunes. This became the CSR movement. And today there are journals, magazines, conferences, and many books that advance the idea that the moral responsibility of corporate managers is to benefit society, not the owners—shareholders, investors, stockholders—of the company.

This line of thinking is a not altogether subtle attack on the nature of the capitalist economy. In a capitalist system, companies are owned by those who buy shares and invest in them, and their managers’ purpose is to make them succeed in the marketplace. Such success is measured, naturally, by how profitable they are, how good a return they bring in from their owners’ investment. The details depend on the kind of firm in question, obviously, but this is the general understanding of capitalist business.

Of course, from the beginning the idea of capitalism—a term first used by critics!—has been demeaned by many people because it treated profit-making as a good thing. Going into the marketplace with the intention of bringing home a good return on one’s investment just appeared too greedy, too avaricious. Never mind that, in fact, once one makes a good return on one’s investment, it is an open question as to what one will do with the wealth one has accumulated. So the practical impact of rejecting the capitalist model is not so much a rejection of wealth but a rejection of the private allocation of wealth. Critics of capitalist business, in other words, do not want private individuals to be in charge of spending the profits made in business. They would like society or the public—which for practical purposes translates into government—to decide what happens to the wealth.

This used to be called socialism, but by now that grand experiment as a political economic system has had innumerable setbacks across the globe, so the term “socialism” has been dropped. Instead we have CSR or stakeholder theory. If such an idea can catch on, it will have the same impact that socialism does—to undermine the rights of individuals to allocate their own wealth and place this power into the hands of politicians and bureaucrats. All this without having to fess up to favoring socialism.

What needs to be debated in the field of business ethics is whether ownership confers the rightful authority to allocate resources. There should be no question-begging presumption that companies must serve society (all others in the realm)—after all, if they do their business well, they do that anyway while they are seeking to make profits. How profits should arguably be used should be left to those who earned them.

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Tibor R. Machan, Ph.D., Professor of Business Ethics and Free Enterprise, gave a speech at Franklin College on June 6, 2007, entitled “Business Ethics and Corporate Responsibility: Shareholders versus Stakeholders.” Professor Emeritus of Philosophy at Auburn University, he also holds the R. C. Hoiles Chair in Business Ethics & Free Enterprise at the Argyros School of Business & Economics, Chapman University, in Orange, CA. He is the author, most recently, of The Morality of Business, A Profession for Human Wealthcare (Springer, 2007). He also co-authored, with James E. Chesher, The Business of Commerce: Examining an Honorable Profession (Hoover Institution Press, 1999). In the autumn of 1983 and again in 1985-1986 Dr. Machan was the Harwood Professor at Franklin College.