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Ethics: can you afford not to have them?

by Simon Longstaff

Introduction

At first glance, the question that I have been asked to address is generous, for it invites me to paint a glowing picture of how a commitment to the ethical life can bring a combination of profits and peace of mind.

Yet, if I was to accept such an invitation and make a response along the lines indicated, then I think I could be fairly charged with having been less than honest with my audience. This is because I would have wilfully ignored a harder question that lurks close below the surface of any discussion about the ethical dimension of business and the professions.

In my experience the real question faced by people on a day to day basis is this:

Can we afford the luxury of being ethical?

Specific examples, based on the general form of this question, include:

• Can we afford the cost of making this product safe?
• Can we afford to admit negligence even though we know that we did the wrong thing?
• Can we afford to let the company's accounts show the real value of our assets?
• Can we afford to refuse to carry out a client's instructions even when, in all good conscience, we believe to follow them would harm the community?
• Can we afford to resist paying bribes in order to secure a contract in a difficult overseas market?
• Can we afford to resist taking advantage of an unintended loop-hole in the law or a contract?

There are some people who are totally oblivious to the ethical dimension of their lives. Such people explain their actions by saying things like, "That's just the way we do it around here", or "It seemed like a good idea at the time", or "... everybody does it".

There are others who are wilfully blind to the consequences of their actions, especially as they affect others. Sometimes the rewards for ignorance are so great that people will rationalise behaviour at work that they would never tolerate in any other setting.

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The challenge of conflicting duties

But for the most part, people in business and the professions are fully aware of the ethical issues and dilemmas that arise. The trouble is that they frequently find themselves genuinely perplexed about how to act. It is fairly rare for selfish concerns to lie at the heart of the problem (although such matters cannot be discounted entirely).

Rather, the difficult issues typically arise because of a conflict in duties to stakeholders. For example, how does one balance the duty to maximise the return to shareholders with that owed in respect of the remuneration and welfare of employees? How does one balance the duty to safeguard jobs with the duty to bear the additional costs of protecting the environment? And so on ...

One response is to suggest that the conflicts in duties is frequently exaggerated; that there is a general failure to recognise that the long-term success of an enterprise depends on a capacity to recognise an interdependence between people with apparently different interests. In this vein, I have always been immensely impressed by the wisdom of one of Australia's most senior company directors, the late Sir John Dunlop. In considering the difficulty of reconciling the interests of shareholders with others, he argued that:

I put it to you that the directors are responsible to the shareholders for profit in perpetuity; and that this general expression of a principle permits, indeed requires [my highlighting], directors to pay full regard to their employees, to labour relations generally, to the community, to the country, in all their decisions for and on behalf of shareholders.

It is a way of thinking about commercial relationships that one suspects would be unfamiliar to many of those sitting in contemporary boardrooms. Indeed, I often wonder about the status of some of the deeds done in the name of shareholders. Although I do not have any empirical evidence to back up my contention, I suspect that although shareholders look to a dividend, they do not expect it to be generated at any cost.

I further suspect that most shareholders (and certainly most of the ordinary people whose funds are managed by institutions) would be prepared to sacrifice a cent in the dollar of dividend if they knew that this would allow for the production of a safer product or decent conditions for employees or a cleaner environment. The trouble is that Boards of Directors rarely, if ever seek, to determine the views of shareholders on such matters. There is an unfortunate tendency to assume that investors are one dimensional characters whose range of self-interest is limited to selfishness.

I believe Dunlop's point of view to be sound. However, if we are honest about the character of the ethical dimension we inhabit, it must be admitted that one encounters plenty of ethical dilemmas where there is absolutely no certain path leading to the reconciliation of competing interests. Consider one simple example: most people would agree that it is right to tell the truth, most would also agree that it is right to avoid causing harm to others. And most have encountered a situation where to tell the truth would be to cause another harm.

It is not that either principle loses its value; rather, we are left in the uncomfortable position of having to choose the 'least bad' alternative.

Part of the discomfort experienced during such situations arises from the fact that we are made to feel uncertain about how best to act. It is my observation that people generally dislike uncertainty - especially when they live in a time (such as our own) where the illusion of certainty is so strong.

The Modern era has been characterised by an abiding sense that the application of human reason could give rise to sciences and technologies capable of generating certainty in an uncertain world. And for the most part, naive expectations seem to have been satisfied. Although we now know the very foundations of matter to be riddled by uncertainty, our daily experience confirms that we have been able to calculate our way into a world where air-conditioning defeats the vagaries of a changeable climate, where the jet engine has tamed the vicissitudes of travelling beyond familiar horizons, and where wrinkles in the historical memory have been ironed out by communication technology so powerful that it allows each of us to experience momentous events as they occur.

Is it any wonder that so many people experience ethical reflection as an unwelcome and alien experience? In a world where certainty is so prized, there must be a temptation to reject, as unimportant, those aspects of the human condition that confront us with fundamental uncertainty. Hence the strong desire to have someone prove that living the ethical life leads to quantifiable, certifiable benefits. Hence the question about whether or not we can afford to be ethical. In business and the professions this translates into a requirement that the proponents of an ethical life demonstrate how its adoption will add value to the 'bottom line'.

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Is good ethics good business?

There have been some attempts to answer this challenge. One of the most compelling pieces of evidence has come from the United States of America. James Burke, former head of Johnson & Johnson, sought to discover if there was some sort of 'objective' indicator to prove the contention that "good ethics is good business".

Going straight to the heart of the matter, Burke reasoned that the most persuasive evidence would be found in an examination of performance on the Dow Jones Industrial Index. Burke compared the performance of several companies selected because of their demonstrated commitment to implementing programmes to strengthen a corporate climate of best ethical practice with the performance of all other stocks. His time of comparison stretched over a forty year period. Where the general improvement in the value of the 'control' group of company stocks during that period was an average increase of 6.2%, that of those selected for study was 11.3%.

There are a number of points where such a finding can be criticised. For example, it could be suggested that the performance of the companies flowed from factors other than their attention to ethics. In reply, it might be argued that in the case of each company selected by Burke, the issue of ethics was addressed across the board.

At the very least this would allow for the conclusion that although we cannot know that serious attention to ethics made the crucial difference, it is clear that the programme had no adverse effects. A critic might then reply by suggesting that the companies might have done even better, if only they had not wasted time and other resources on ethics. There is no way to answer such a hypothetical conjecture except to say that in each case the companies did concentrate on the ethical dimension of their activities!

A second objection might be made by pointing out that some of Burke's companies have since been shown to have acted in ways that most would conclude to be unethical. I don't believe that this reduces the significance of the information. Instead the pounding that one or two of these companies have received on the share market since the untoward behaviour was discovered would seem to confirm the finding. It suggests that there are grave penalties to be paid when sound ethical behaviour is abandoned.

It is not too difficult to see why good ethics might make for good business. An adequate exploration of the full dimension of this topic would take more time than is available today. But let me offer one or two observations.

The first of these is that it should be fairly obvious that an erosion of trust nearly always leads to an increase in the cost of doing business. We should never forget that the possibility of a free market depends on their being an underlying ethical framework. For example, such a market depends on their being a full and frank disclosure of relevant information; it depends on participants refraining from collusive practices that give rise to distortions. As the AMP Professor of Management at the Australian Graduate School of Management, Jeremy Davis, has observed when considering the importance of a world with trust:

... in some sense we are contrasting a world in which the notion of 'my word is my bond', a world of high trust, with a world which is purely caveat emptor, which implies very low trustworthy organisations. And the thing that I think economists teach us which bears on our morality is that the first is likely to be a much more productive society in any economic sense, because the entire deadweight loss of inspection, of protection, of insurance and of contracting is held to a minimum.

What holds good for markets, in general, also applies in the case of companies and other organisations. Untrustworthy organisations must carry the cost of dealing with other parties who will look to relatively expensive means for securing arrangements. Organisations with a low level of internal trust have the additional burden of substituting structures of control for the substance of voluntary compliance.

At a superficial level, it may seem cheaper to run an enterprise according to strict and fairly rigid lines of command. However, I would argue that such an approach must include a kind of 'opportunity cost' associated with an absence of open communications and an attendant failure to harness the full value capable of being generated by a workforce that believes itself to be trusted in the management of the enterprise. As observed in an article published in Fortune in 1992:

Successful enterprises are inevitably based on a network of trust binding management, employees, shareholders, lenders, suppliers and customers - akin to the network that Japanese call keiretsu. When companies slip into shoddy practices, these crucial relationships start to deteriorate. ... Eventually a kind of moral rot can set in, turning off employees with higher personal standards and stifling innovation throughout the company. ... People in these situations feel frightened, constrained. They are not in the proper frame of mind to take prudent risks.

Or putting it more positively, an American manufacturer in The Asian Wall Street Journal reports:

Our highly moral policy had a marvellously beneficial effect on our employees. Because they implemented the policy, they had cause to feel proud of the company simply because they could feel proud of themselves. It added to the creation of mutual trust.

I have gone to some trouble to give some grounds for believing that good ethics is good business. Yet, I now want to suggest that the maxim is one that ought to be avoided.

It does not matter that we can show that the long-term benefits are there. The point is that we should be ethical even if there is no profit to be made. To return to the beginning of this address, I would answer the question by arguing that we should be ethical - even if there is a cost!

While it is important to accept the very real collateral benefits that flow from being ethical, we need to have a stronger commitment to ethics than that it is likely to deliver a combination of profit and peace of mind. If that was all that there was to it, then a commitment to ethical behaviour would be ditched as soon as one could discover a way to boost profits by being unscrupulous. As a matter of fact, there are some greedy and rapacious operators who thrive, for a time, by developing the facade of trustworthiness.

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The more things change the more they stay the same

Here are just a couple of things that have been written about such people:

... the profiteers insolently and covertly attack the public welfare ... They charge exorbitant prices for merchandise, not just fourfold or eightfold, but on such a scale that human speech cannot find words to characterise their profit and practices.

Or again,

... those I abhor are the unprincipled men who ... use unethical means to obtain undue profits ... they hoard currency or commodities to force the value up ... I will have nothing to do with such people.

I suspect that for most of us the language is vaguely familiar. Yet, each of these pieces is drawn from the fourth Century AD. The first extract forms part of the Roman Emperor Diocletian's decree of AD 301. The second extract is from the pen of the Chinese scholar, Ho Hung.

Closer to us in time lies the period of catastrophic social convulsions known as the fourteenth century. In a brilliant depiction of that time, Barbara Tuchman, summarises an age.

... economic chaos, social unrest, high prices, profiteering, depraved morals, lack of production, industrial indolence, frenetic gaiety, wild expenditure, luxury, debauchery, social and religious hysteria, greed, avarice, maladministration, decay of manners.

No wonder she entitled her book A Distant Mirror. As Voltaire noted, "history never repeats itself, man always does".

Now my reason for drawing attention to these observations of, and from, the past is a simple and, I hope, a reassuring one.

One of the benefits of the past is that we can look at where we have been, recognise the footprints that lead to our own time, and know that we too can survive it all, perhaps to be the object of study of an unknown generation of future historians.

Whilst I would not want to suggest that we should return to a position of complacent optimism concerning the prospect of humankind's ultimate perfection, I do want to suggest that we have reason to believe that the cycle of history allows for periods of consolidation and correction.

Governments have a role to play in this period of consolidation and correction. As a rule they need little encouragement to expand their range of activities. And for the most part, I believe that their agenda is driven by a genuine concern to govern well. However, at times when confidence is low, the community looks to government to do something to correct imbalances in the system. In almost every case the government will respond by introducing new legislation leading to an expansion in the regulation of the system.

As noted above, legislation, regulation and surveillance all come at a cost. They cost time and money to those who are subject to these measures and, ultimately, this cost is passed on to consumers. Consumers are charged a second time in the form of taxes needed to pay for the level of bureaucracy required to administer the new systems.

But it is not just the financial cost that should be borne in mind. Of equal or greater significance is the fact that the imposition of systems of external control has a significant impact on the quality of life in a society. I do not mean to suggest that there will be a deterioration in the material standard of living.

Rather, there is a reduction in the privacy that we can enjoy as citizens. And this in turn has an impact on the sense of our freedom and autonomy.

Then again, some do find that the prospect of external control is an easier option than that of exercising self-discipline.

We must, however, be wary of thinking that governments can force us to be good - any more than that they can force us to be free! It may be instructive to cast our minds back two hundred years to France.

Two centuries ago, the Terror had built to its bloody crescendo in Paris. Still sitting at the centre of the maelstrom, Robespierre believed that the guillotine could be used to cut the cloth of France into a shape fitted for his much proclaimed Republic of Virtue. Robespierre was not some wild-eyed fanatic. He really believed that a system of controls could lead people to be good. And in the France of those days, everything was controlled - prices, wages, movement, even places of worship (with Notre Dame turned over to the new civic deity, the Goddess of Reason).

In his turn, Robespierre was sent to the guillotine. As he mounted the scaffold, I wonder if he realised the utter futility of his project? Too much regulation and surveillance destroys the one thing that people need if they are to be truly virtuous; that is, a sense of personal responsibility. It is because of this that we should be wary of any group or individual claiming to have all the answers and a system to make us good.

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So what is to be done?

The first thing is to recognise that an appropriate response will be one in which the complexity of the ethical landscape is acknowledged. Too many managers think that the problem of ethics can be solved with a 'quick fix'. The usual response is to develop a Code of some sort, have everybody sign it and then celebrate the fact that ethics has been 'done'.

Such an approach is clearly inadequate. Yet, it is fairly typical of what might be expected in a world where technical solutions are sought for every problem - whatever its complexion.

An adequate response to the problem of ethics requires a broader response from society as a whole. In particular, we need to take stock of the role played by various established institutions. In this respect, I want to take a moment to look at the place of one important group, the professions.

There are some (including a number of people in the professions), who find it a genuinely novel suggestion that the professions have an over-riding responsibility to act in a spirit of public service. That is essentially what it means to be a professional. Yet one still hears stories of the 'guns for hire' who are prepared to do anything providing only that it is legal (and the price is right).

There is evidence of a growing perception that the professions have failed to honour their part in a social compact with society. Members of the community are well aware of the fact that the professions enjoy special privileges, such as: the exclusive right to perform certain functions and the right to engage in self regulation. There is, however, a great deal of cynicism about the commitment of the professions to the ideal of public service.

One response has been to suggest that the traditional understanding of the professional compact be set aside in favour of treating the professions as just another set of service providers. This would see people in the professions released from the older obligation and, instead, left free to act according to the dictates of self-interest.

This is not to say that this would unleash a sudden surge of selfishness. Adam Smith knew that there is a world of difference between self-interest and selfishness. His insight may provide the basis for an answer to the question of whether or not we can afford to be good. In the end it all depends on whether or not we take seriously the suggestion that each of us has a part to play in the creation and maintenance of a society in which individuals are free to flourish in community with one another.

There are times, such as in the debate about the role of the professions and when considering the crucial role played by those working in industry and commerce, when it seems to me that we have lost sight of the real bottom line. Let me make it clear that I support efforts to improve economic efficiency through increased competition and the development of free markets for goods and services. Such measures provide the means by which the welfare of all can be guaranteed. However, I am concerned that we sometimes talk as if competition and markets were good in themselves. We seem to forget that they are but means to a greater end, the fashioning of a good society.

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Society vs the ‘enterprise association’

In the current social environment there are many who would argue that a genuine commitment to ethics is an unrealisable ideal. Many think that sound ethical principles are fine in theory but that they can't really be applied in practice. To try to do so is to be nostalgic. They say that to promote virtue is to be old fashioned, to hark back to ideas only useful in a different era. They ask us to be 'realistic' and to embrace the 'modern' way of doing things.

This plea is often nothing more than an ill disguised call to allow for the survival of the fittest. Perhaps such people are right. Perhaps a dog-eat-dog world will be the most efficient. And perhaps efficiency is the only value that we need to embrace in the search for a worthwhile life. Or perhaps efficiency is only one of a number of important values that we must learn to juggle across an unpredictable landscape.

Those of us who are serious about the need to make ethical considerations an explicit concern in our daily lives must face up to this challenge. After all, what if our critics in the market place are right? What if the prime (and exclusive) aim in life really is to maximise our satisfaction of wants (and not just needs)?

What if the liberty of the individual (important as it is) transcends all other considerations? What if it is through competition alone that we find the ultimate expression of our humanity?

Most people have a fairly good feel for what it means to live in a 'society'. But what about an ‘enterprise association’? John Casey has tried to describe the latter:

We might imagine a city founded purely as a trading post. The laws of the city will reflect its original purpose, and have to be understood in relation to this purpose. Contracts will be vigorously enforced however unreasonable or unjust, because it is of the highest importance to retain the confidence of those with whom the city trades. Indeed, the notion of a contract being 'unjust' will have no meaning. All education will be subordinated to the need to produce an 'enterprise culture', and no subject will be studied as an end in itself. The rulers of the city will regard themselves essentially as the managers of the enterprise. Their tasks will be to maximise wealth and promote trade.

Is this so very far away from what we now experience? Some may say that this is an accurate and even attractive picture of the type of world in which we live. But does such a view of our relationships miss something of vital importance? For example, do we exist simply to "facilitate the exchange of commodities" or is there something more? Is there, for example, a need to value friendships, to realise that other people can make a claim on us? Is living in a society only possible when we recognise that each person is bound to others within a network of formal and informal relationships?

The challenge facing us today is to make a choice about which alternative we want. Do we want a society of citizens in which something like the virtues of justice and benevolence make sense? Or do we want the enterprise association in which each of us is little more than a purveyor or consumer of commodities? The latter consigns us to a place where the exercise of virtue will seem an unattainable luxury, where no person can afford to display moral courage.

So to conclude. I return to the questions lying at the heart of this address. How then might I answer without sounding glib? What might I say to those whose daily experience confronts them with the need to justify (as much to themselves as to anyone else) each decision to do what is right and good?

My answer must surely be to acknowledge again that there are no easy answers; to acknowledge that the costs associated with living an ethical life are real and often substantial. But I must also answer that questions about the ethical life take us well beyond issues able to be determined by a kind of cost-benefit analysis. This is because it is in the ethical dimension of our existence that we encounter the truth about our unique potential as persons. The choices we make present us with an opportunity to cast off the shroud of necessity woven about the threads of our animal nature and transcend the mundane. In short, we are free to choose the right and the good.

There is a kind of natural heroism displayed by those who choose to live a good life. We recognise their courage because we know how easy it would be to do otherwise. Courage of this type can be displayed in every forum of human endeavour - no less in the world of commerce!

In the end each of us is confronted by a third version of our opening question. We are asked to consider whether we can afford not to live a good life? For my part, I think not.

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