Do business ethics have a future beyond the '90s?

By Simon Longstaff

A version of this article was first published: as notes for a speech - December 1995

The question that I have been asked to address today invites me to speculate about whether or not there will be a concern about business ethics in the twenty-first century. I suspect that a number of people will assume my answer to be in the affirmative. They will not be disappointed!

There are two main reasons for my positive answer. The first of these is based on the uncontroversial observation that, as with every other field of human endeavour, the world of business includes an inescapable ethical dimension. As such, there will always be a need for people to examine the ethical landscape in which business is located, and attempt to map its general contours as a precursor to exploring ways in which its boggy terrain might be traversed.

The second reason for my answer is slightly more controversial. Rather than seeing changes in the pattern of applied business ethics as being 'cyclical' in nature, I want to suggest that there is now an emerging spiral effect. Although largely confined within the bounds of the 'integrated international economy', I would argue that this change is a result of at least two related events; what might be called the 'democratisation of capital' and an increase in shareholder activism.

It is argued that a likely effect of this change in the business environment will be to bring about a marked increase in awareness of the need to offer a sophisticated response to the challenge of ethics as a pre-condition for engaging in successful enterprise. It will be evident that all of this has fairly profound implications for those who would address issues of corporate governance; implications that may even lead to a re-definition of the usual terms of debate.

Perhaps something needs to be said about each of these points, beginning with the nature of the ethical dimension of business.

Reason one:

• Talk about the '80s, but point out that we must move on.
• Point out that similar problems have arisen in earlier times. Use examples from Rome and China.

In times such as these there are always people ready to put their pen to paper. Here are just two examples of what has been written:

... 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, who wrote those works in the first half of the fourth century.

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".

Hugh Mackay has done much to mature the debate. For example, he has drawn attention to the fact that the progression from the 'excesses of the '80s' to the uncertainties of the ‘nervous ‘90s’ has been part of a continuing process of change in Australian society that has been accelerating since 1945. Mackay argues that periods of uncertainty are marked by a renewed interest in basic values. But he also warns that the search for stability and certainty may lead people to call for much greater government intervention and regulation that, paradoxically, may further erode the individual's sense of personal responsibility to the community.

In a complementary argument, Professor Cliff Hooker of the University of Newcastle has suggested that an increase of interest in ethics is the latest response to the problem of managing a complex society. Hooker illustrates his point by asking us to imagine the damage that can be done by a person wielding a pair of bolt cutters in 1993 as compared to 1793. In earlier centuries the individual vandal could cause only local damage.

Today it is possible for one person to wreak havoc by breaking into and damaging a society's technological infrastructure. Vast numbers of people can be adversely affected. The same can be true in terms of non-physical damage. Mass communication makes whole societies susceptible to the enervating effects of reported misdeeds and avoidable tragedy.

Given the cost of applying external 'controls' to every element of a complex system, Hooker argues that a resurgence of public interest in ethics is a reflection of a desire to provide a renewed framework for the exercise of self-discipline. This crucially depends on the development of an environment in which support is given to the idea that people should accept responsibility for what they do as individuals and in community.

As Davis has observed:

... 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.

Reason two

• International dimension ... much more in tune with issues. Have gone beyond a quasi-technical response in which development of a code is the most 'sophisticated' response ... Need for a bit of sophistication
• Perhaps more importantly ... with free flow of capital and increase in foreign investment, there has been a recognition that sound ethical behaviour may be necessary to provide stability in investment regions where strong growth is possible ... but, where the usual legal structures are absent or only in their nascent form.
• Alterations in framework for corporate governance - leading to reduction in regulations (economically desirable) ... therefore, need for greater attention to ethics - see regulation of conscience.
• 'Democratisation of Capital' - government pressure to increase savings, pressure to have funds invested locally. Increase in power of institutional investors.
• Changes in regulatory framework seeing greater representation of fund owners (beneficiaries) on Boards of Trustees.
• Employees are not going to want to have maximum return on investment if this means that their own jobs are going to be lost ...
• Ethical investors are not wanting maximum return on investment if this means destroying the environment or harming one group to the advantage of another.

In the eitght years prior to 10 January 1993, the Friends Provident Stewardship managed pension fund turned in the best performance of all British equity managed pension funds, providing an annualized return of 20.2% ... In the year leading to 1 February 1994, the same fund returned 31.3% ... And the Friends Provident Stewardship income fund, also ethically managed, returned 41.3% in the year to 1 February.

Companies which are well-managed enough to deal with the environmental responsibly, treat their employees fairly, and address the concerns of their communities are good places to go trawling in the first place ...

Peter Silvester, Investment Director, Friends Provident.
Herald International Tribune, 26-27 February 1994, p.15

• Increase in concern for society and the foundations for an economic system, social concerns, parallels with the environment - may lead to lasting change...
• Consumerism and effect on markets...eg. Levi Strauss
• Usually looks at directors etc. Perhaps now need to look at all of the structures for managing an enterprise.
• The late Sir John Dunlop expressed views that many would regard as having been ahead of their time. Speaking in 1964 he observed:

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, 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.

This is to recognise the claims of those who, in current parlance, would be referred to as stakeholders. Sir John Dunlop saw that the interests of shareholders could only be properly protected if directors saw their role as that of trustee. But such a recognition comes at a price. It is a relatively simple matter to decide what one ought to do if one's obligations are seen to be exhausted in service of the interests of current shareholders.

However, when there is a diversity of immediate interests - some of which may compete, then there is a need to provide a framework in which decisions can be made. That is, there is a need to develop a set of guiding principles founded on established values.

Conclusion

• Practical deliberation - problem with too much theory - tends to oversimplify the world
• Need to accept the reality of an ethical dimension
• Need to accept the existence of the ethical dilemma
• Need to understand that it calls for the exercise of practical wisdom