The Paradox Of Business Ethics

The idea of business ethics and the “ethical business” is a contentious one. Peter Drucker, the managerial legend, believed that a business’ purpose is to create and keep a customer. For economists such as Milton Friedman, the purpose of a business is to earn its shareholders economic profits. Friedman believed this so strong that he claimed a profitable business was fulfilling its “social responsibility”. Friedman would argue that the proof of this is the economic devastation, joblessness and low wages that quickly follow an unprofitable business or worse, a business forced to shut down. Yet, as people have become aware of the impact that businesses have on climate change, our politics, and even in shaping our cultural norms, there has been a call for a different kind of business, a truly ethical business with a mission that goes beyond that of earning profits or fostering markets. As we have realized that markets can create incentives toward unethical actions or investments, people have begun to question traditional business. Many big businesses have joined in at least paying lip service to the idea that a business has or should have a higher purpose. However, as we will see in this article, the notion of an ethical business contains certain paradoxes. 

As Friedman would argue, a profitable business generates paying jobs, helps to develop infrastructure for the community, provides services that the community clearly wants -demonstrated by their willingness to pay for them-, and so, creates a social good. Surely, then, that business is, by being a profitable business, an ethical business? What better thing can a business do? Many defenders of the many monopolies in America often say that the success of those businesses shows that Americans want their services. Being a monopoly is the just reward of a business performing a vital social role? It is hard to argue against that point, but that lacks nuance. 

Creating shareholder value by growing economic profits can transform society for the good. Yet, many businesses have executive compensation plans that create obscene incentives to act against the interests of shareholders and in favour of their own compensation. For instance, a chief executive officer whose pay structure is linked to market performance for the year, has an incentive to do things that boost the share price of the year. That may include reducing investment in research & expenditure, skimming on safety, fast-tracking projects and other decisions that not only destroy long-term shareholder value, but hurt the broader community. Incidents like the Deepwater Horizon oil spill, show what happens when businesses lose sight of the long-term.

Sometimes, the ethical thing is not the profitable thing to do. Managers wrestle with these questions, knowing that shareholders want profits, debt holders expect their money back, and markets are watching for signs that a business has lost its way. For instance, many oil firms are under pressure to shift toward alternative energies. Yet, those oil businesses have to contend with the fact that oil demand is still high in the developing world and places like China. Those oil firms have to face up to the possibility that they are ceding the market to other oil firms, while taking on alternative energies they may not succeed in. Balancing all these concerns is a difficult thing for managers and society at large. As the Counseling Compact expands and develops, it’s important to find solutions to help people battling with these high-pressure, high-stakes questions.