Corporations and Ethics: A luxury good?

Found this here and thought we could have a conversation. In brief, should we expect big business to do good and to make money? Does this make a difference when you choose your vocation or your job or your employer? Is this question being asked more and more?

Bill Gates began this discussion a year ago by arguing for a new
type of capitalism where firms would do good while doing well, solving
the problems of poverty and disease that still stalk the planet.

In a sense, Mr. Gates’s real intellectual opponent is Milton
. Nearly 40 years ago, Friedman argued, in the pages of The New
York Times Magazine, that corporations have only one responsibility:
maximizing profits. Firms have been entrusted by their shareholders to
earn money. If shareholders then want to use that money to do good,
then that is the shareholders’ business. Friedman argued that corporate
chieftains should not use other people’s money to cater to their own
social causes.

Two of my favorite scholars, Richard Posner and Lawrence Summers ……. Mr. Summers
pithily sums up the case against Mr. Gates:

It is hard in this world to do well. It is hard to do
good. When I hear a claim that an institution is going to do both, I
reach for my wallet. You should too.

Mr. Summers reminds us of the problems created by hybrid
institutions like Freddie Mac and Fannie Mae, where profit maximization
and public support came together to cost taxpayers plenty….

The hard problems concern whether there is ever a role for
corporations that try to do more than just the minimum
profit-maximizing level of ethical behavior
. The problem with
Friedman’s vision is that not every employee is crazy about the idea of
spending their working life solely to enrich anonymous shareholders. As
the world has gotten richer, more and more people have opted for jobs
that at least appear to be serving some greater good

In econ-speak, a sense of doing good is a luxury good. Journalists
like to think that they serve truth as well as their newspapers’
owners. Doctors like to think that they have a duty to patients as well

as to the H.M.O. that employs them. Firms cater to this human taste by
frequently telling workers that they are doing both well and good, and
sometimes that talk is more than just empty employee relations.

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  • Dave

    An ellipsis needs but 3 periods, like…, but not …….

  • RJS

    This opens a can of worms: Doctors like to think that they have a duty to patients as well as to the H.M.O. that employs them.
    Implication that Doctors are employed by an HMO and should dedicate themselves to maximize profits for shareholder? Any other emphasis is “wishful thinking?”
    Beyond this though – maximizing profits as the only goal is always short term and almost always adversarial. Should a corporation care about “green” practice? Should a corporation eschew sweatshop exploitation? Was slavery justified because it created maximum profit for “shareholders”?
    Clearly few of us actually hold to “maximize profit” as the only real goal.
    Should a drug firm invest some capital and resource into developing drugs for relatively uncommon diseases or should all effort go into projects common enough to have large payoff?
    Should companies invest in durable products – or is designed obsolescence swamping landfills with metal and plastic and… simply good business practice?
    I don’t think companies should necessarily invest in charity work – in this case “corporate chieftains should not use other people’s money to cater to their own social causes”. But the “do good” ethic should go way beyond this.

  • Bob Young

    Brian McLaren’s book “Everything Must Change” explores this topic. Rather than extract pithy quotes for you all (which I think would be a disservice to his argument), I’d just suggest that you check it out for yourself.

  • RJS

    We had a long discussion of McLaren’s book – 18 posts. Quite interesting actually, but you give the impression he has all the answers worked out. This just isn’t so.

  • This is an ongoing and vigorous debate in legal scholarship over “corporate governance.” The American system of corporate law assumes that the primary duty — not the only duty, but the primary duty — of a corporation’s Board of Directors is to maximize shareholder value. This duty is not completely unbridled — it is subject to other legal duties, particularly those imposed by health, environmental, and securities laws.
    Note that an individual employee does not have exactly the same obligations as a Director under this scheme. The employee, of course, is expected to be primarily interested in his or her own welfare (making a salary), subject to fiduciary duties of loyalty to the corporation. If an individual employee feels that the corporation is acting unethically, or wants to work in the non-profit sector (in which shareholder value is not the primary duty of the firm), that employee is free to take his or her labor elsewhere. Thus, labor markets, as well as government regulation, can help temper corporate conduct. This, of course, depends on a healthy job market, which right now is anemic.
    Other countries, particularly in Europe, define the principal duty of the firm not as maximizing shareholder value, but in a broader social welfare context. German corporations, for example, are governed not only by independent Directors, but also by groups representing labor and the local community.
    So, there are at least two significantly different theories of the firm: a separate entity held together by contractual relationships and governed by Directors answerable primarily to private shareholders, or a social entity governed by financial, government, and community stakeholders. The debate over which theory of the firm is most efficient, most just, etc. is endless and probably intractable at any broad level of generalization.

  • dopderbeck

    BTW, the question about doctors and HMOs is a different one because doctors have obligations of professional ethics as well as legal duties to the patient (e.g., confidentiality) that in many ways limit their fiduciary duties to the firm. The same is true with lawyers.

  • Your Name

    My $0.02:
    I think that we should expect business in general, big or small, to focus on the consumer.
    It will be left to the consumer to make decisions about what matters to them. If the consumer wants to go “green”, you’ll see the business make strides to incorporate that behavior. If the consumer cares about community, you’ll see the business strive to donate x% of proceeds to XYZ charity, to support this desire, because the business knows that this will give them an edge over competition. The flow of money will send the message.
    The problem is, too many consumers are SAYing they want this or that, but then when the money comes down to it, they buy whatever’s cheaper. Especially in this economy.
    If we are concerned about buisnesses doing “good”, we really should be “putting our money where our mouth is” more often…and smart businesses will start doing things like GAP’s (Red) campaign, which has grown from clothing, to iPods, to Hallmark cards. If a company really does something that goes against what a consumer thinks they should, stop buying…then educate those around us of the practice that we have issue with.
    Perhaps that will mean helping others around us…supplying them with the resources to help make a difference. For example, if environmentalism is a concern to you, give a new, young mother cloth diapers (instead of disposable ones), and help her figure out how to use them, while explaining the monetary and environmental benefits of using them.
    The systemic issue with that is that this will require us to deeply invest in the lives of those around us…both with time and money. It’s much easier to sign a petition to get the government write a check for need, than it is to monthly budget and do without in order to send money to support a charity doing work to meet the need(s) you’re passionate about. Just my thoughts… :0)
    Thanks for the post! Very interesting…and a lot to think about!

  • Diane

    Jesus said “put first the kingdom.” I have a problem with an abstract construct–”big business”–somehow being exempt from this teaching. This mad pursuit of profit alone and at any cost represents a deep sickness in our society. Maximizing profit should NEVER be the exclusive goal of any business or individual. I know that saying this will upset people and/or seems soft headed. I know there are a thousand sputtering rationalizations about how “in the end” pursuit of profit exclusive to anything else benefits all people etc etc. …But I trust Jesus and think the “profit above all” theories are a delusion.
    BTW, journalists have professional ethics too or are supposed to.

  • Kate

    Oops…that “your name” is me. Forgot to put my name in the blank!
    …carry on.

  • Part of the problem is that corporations don’t exist. They’re legal fictions that allow a million individuals to own one company.
    How does a corporate board of directors “do good” in a way that’s consistent with the values of all one million owners?
    No matter how hard you try, you always run the risk of supporting something some of your shareholders don’t.
    So your choices are to either let the board run things as if they’re the owners of the company and the other shareholders are just people who gave them money, or leave “doing good” with the corporate profits up to the individual shareholders (assuming dividends).
    I’d say the best approach would be for the corporation to strive to “do no harm,” and leave charity up to the individuals.

  • Your Name

    you cannot serve two masters…to seek only after money, from my perspective, is to invite big problems. we are probably aware of many of the problems that this can involve, both socially and environmentally. And since we live in a global economy, many of those problems are left daily, not for us to deal with, but others.
    also, part of the problem is that we are not dealing with abstract numbers, but real people and communities. to say that the market will eventually work it all out is to basically say we are willing to let others suffer for the injustices of companies that operate in our countries. i struggle with this a lot.

  • paul

    another quick thought.
    to say that our goal is to maximize profits is to put you in tension with ethics. as long as doing buisness ethically makes the most money, we are fine. but if we can make more and consistent money by being unethical (socially, environmentally, etc) then we may be willing to make this move.
    i think we need to find a better balance between ethics and money… if this is what Bill Gates is calling for, then I think it’s a good idea

  • Sue Van Stelle

    Please say more about corporations striving to “do no harm.” Corporations pulling up stakes and leaving hundreds unemployed in a community do harm. Corporations creating toxic disposable products that end up in landfills do harm. Corporations which tolerate unsafe conditions for the sake of profit result in injuries–they do harm. Corporations which demand that employees put in long hours in stressful conditions do harm…
    How is not doing harm any different from doing good? Not doing harm is in itself an ethic with far-reaching consequences.

  • Scot, this post immediately made me think of a book, GainManagement, by one of my father’s dearest friends (along with his son) from Grand Rapids — and the work they did following that of Scanlon. Here’s the link to Amazon:
    …while The Abbess was doing her biblical studies, it was part of a dual major in organizational management….

  • Your Name

    Being a long term member of the corporate construct, I’d like to make a couple of observations perhaps yet unsaid.
    First, no one has mentioned the problem (yes, problem) that government poses on business. There are no more ethical or moral choices in business when government tells you nearly everything you can and can’t do..or minimally rewards/penalizes based on tax based engineering. Business big and small in the US acts not based on ethics, but instead based on laws. To state it differently warps the true picture. There is nothing ethically superior to anything Bill Gates talks about. He is simply is a very unique position to be highly charitable and call on others to be so. We do not transact in a free market or anything of the sort. That is also a myth. If that thing truly existed, than perhaps a discussion of who is and what is more ethical or moral in business would be warranted.
    Secondly, even Friedman, before his death, was appalled by what corporate boards (both of public and private companies) were doing in terms of directing profits. Yes, he always believed profits were primary, but today’s nepotistic and (completely legal) pay-to-play corporate governance boards were to him and to me a huge problem. When governance boards of companies are filled with executives of other companies and they all scratch each others’ backs regularly with higher total comp packages and golden ‘chutes (regardless of performance), then profits (more specifically: earnings) become immorally used. How then should they be used? – It’s a question for each company and ALL the people who invest there (including employees who minimally invest time/life there.) But…ANYONE who thinks that a C level executive SHOULD get 300 to 500 to 1,000 times the earnings of the average salaried employee is either themselves a C level exec, on their way to be, in a patronage relationship with one (the business media), or is just crazy.
    Thirdly, not all business is consumer based. The vast majority of business is does not end at the consumer. Consumers, like some posting here, may think they can drive change, but you’ll likely only drive change up the chain you can see. How many people here know how many companies are actually involved in the manufacturing and distribution chain of an Apple iPhone/iPod? Apple might paint it red and send a few bucks to Bono making you perceive its purchase to be more ethical, but what do you think the other companies (and countries) that actually make the device do? That’s right…Apple doesn’t even make the iPod! They don’t even distribute it! They only market it and SOMETIMES act as POS retailer. China, Japan, Taiwan and few other Asian countries and literally a couple of dozen different countries (not the US) collaborate to manufacture and distribute the 450+ parts that go into the thing.
    I guess one can argue we should do what we can, so if you’re going to buy a player – buy the red one. Just don’t try and convince me that Apple is being more ethical in response to consumer demand. It’s nothing more than a marketing program to sell even more disposable, soon to be obsolete land fill material. If you truly want to put your money where your mouth is – don’t buy THE STUFF. Drink tap water, listen to free radio, take public transport, and instead feed the hungry, clothe the naked and spend your free time visiting the sick and incarcerated.
    I know – I’m on a cynical riff here. Sorry.
    Finally, IM (not so H) O, Christians need to look at corporations not so much as businesses that they only critique/patron/work at/oppose, but instead as “rulers and authorities” and follow what scripture says about interacting with those. Let’s be honest about this – when most of the F500 has gross rev higher than most of the (how many?) 200 or less countries in the world, those corporations command and wield REAL power and authority. If you believe scripture, as I do, than those who control those companies (and the corporations themselves) were put there by God. Before you start arguing the shoulds and shouldn’ts and who is good/ethical/moral/or not – you better be praying FOR them as scripture commands.
    These are my thoughts I’ve not yet read here today. I do like what I’ve read, however, and continue to be blessed by this blog and those who comment here. Thank you.

  • In one sense “maximizing profit” *is* the ultimate cause. However, that is falsely construed as “maximizing profit while I am the CEO”. If you looked at it as “maximizing profit over the next 100 years” you would see that profit for the short term while ruining the long term is going to hurt you. You would also realize that for you to really make money over the next 100 years society as a whole needs to grow – and it would be wise to help society grow as well. Without a society in 100 years you’re not making any money. I think the sense of time is what is assumed in each place.

  • Dan

    On diapers…
    My wife and I were really torn about what to do when our first was born, and we did a TON of research. All credible findings in 2006 (the birth year of our first) showed negligible environmental impact difference between cloth and disposable. So, for time savings and convienence sake, we chose disposable. I’ll gladly share the research with anyone who cares.
    I would also like to point those who care about environmental impact and object research (real resarch) to Bjorn Lomborg’s book The Skeptical Environmentalist. He cares a great deal for both the environment and for truth. It’s not the end all book, but it’s eye opening…if not sleep inducing considering the length.

  • ChrisB

    Sue said: “How is not doing harm any different from doing good?”
    When people say “do good” on this topic, they generally mean giving money to organizations, creating programs, or otherwise going out of their way to find ways to “make the world a better place.”
    Not doing harm is focusing on doing your job without making a mess. You mentioned not producing toxic products; not swindling, honoring their committments, not mistreating their employees are other examples.
    Yes, this also requires an ethic, but not a complicated one — “do unto others….” It is simpler and less likely to run into ideological problems (with shareholders) to do no harm than to try to do active good.

  • paul

    Dan (#18)
    I’d be interested to see that research. My wife and I are about to have a baby and we (and a few of our friends) have done a lot of research about this issue. Our experience is that most of the research that is points away from cloth diapers has some major flaws with it…
    this is not to say that cloth is the way to go, just that we have yet to see good, solid research that levels the playing field between them both…

  • dopderbeck

    #15 made a good point about alternatives to existing corporate governance. One significant alternative, which we already employ, is government regulation. But government regulation often suffers from “capture” and “agency” problems. “Capture” means that the industry being regulated unduly influences the regulator (think big Pharma and the FDA); “agency” problems mean the regulatory body isn’t able to supervise efficiently.
    However, I don’t agree that corporations should be viewed as any sort of ruling authority. The are fictitious “persons” under the law, with no greater authority than any other person.
    Sue (#13) — a corporation “does harm” when it moves to another location, but it might at the same time be doing even more “good” by employing people elsewhere or offering necessary products and services to the public at cheaper prices. If that’s the case, how do you weigh the “harm” against the “good?”
    The same is true with pollution — remember, all of us here are using computers, the manufacture of which involves the creation of toxic waste, and the corporate and government-owned web infrastructure that allows us to participate in this forum contributes to our collective carbon footprint (see here: Does the “good” of this forum outweigh that “harm?”

  • ChrisB, “Part of the problem is that corporations don’t exist.”
    So, do nations exist? Do tribes? Do religions?
    Of course they do.
    The modern age very correctly made an important assertion: Individuals matter. But individuals are all part of a social context that matters as well. Individuals matter and are very real. Families, regions, and nations matter and are very real. And transnational corporations absolutely matter and are completely real. They exist, and they have huge effects on our world. We need to do a lot of hard thinking about what each of those entities’ moral responsibilities are (I’m not saying Apple has the same ethical imperatives I do, but it has something).
    DJ, you bring up some interesting points. But are transnational corporations the “rulers and authorities” that we are to submit to, or the “powers and principalities” we are fighting? Or maybe both? Bear in mind the judgment on economic pride in the book of Revelation.

  • Your Name

    The Consumer’s Guide to Effective Environmental Choices is a good first step. Pgs 128-131 speak to the diaper debate. They highlight several scientific and corporate (biased) studies on the matter. Some, clearly with their own agenda. They make the point that back in the ’80s, cloth diapers and cloth services were likely a better way to go given the then current way disposables were made and distributed. Today, (1999) the answer is hardly as clear. Ultimately, the writers of this book point out it’s not the product which one should evaluate but the whole situation the specific diaper consumer is in: “Cloth and disposables will remain two relatively equally matched alternatives. This means that other decisions described in this book are much more important than what type of diaper to use. If you live in one of the relatively few places where the cost of landfill disposal is very high and there are no sound alternatives to landfills, you might want to lean toward cloth diapers. If you live in a place where water is critically scarce, you might want to choose paper. But most people should choose whichever type of diaper makes the most sense in terms of cost, convenience, and the comfort of the child…In recent years, because disposable diapers have become thinner and lighter, their environmental impact has decreased…Similarly, as commercial and home washers and dryers have become more efficient, the impact of cloth diaper has been reduced.” Thing is, Paul, you can’t use a diaper service (part of our other research). Even the “green” diaper services impact the environment far more than you would at home when cleaning the cloth. Additionally, not all cloth diapers are manufactured the same. Remember, manufacturing textiles creates a huge environmental impact (but can vary depending on the material — most “green” materials are not suitable diaper components). In the end, we decided that given our situation, the toss up was true. I actually believe that convenience and time also impact the “local” environment and should not be neglected when weighing options.
    I like your insights. Thank you.

  • ohhhh, there is so much to say and so little time.
    I’m writing a book on this subject! So I am going to make statements and then disappear for the weekend. Hate to do it, but need to at least make the points.
    First, Gates didn’t start the conversation. Many people have been working for 20 plus years to wake up people like Gates. Many of us in the Corporate space were significantly impacted by Paul Hawkins’ “Ecology of Commerce” in ’93.
    I’ve been part of the above group for 9 years, and lead it now with Peter Senge. There was a great conference a couple of years ago on thi subject : Corporation 2020 – google it. Social Venture Network, B-Corps, Investors Circle….I sit amongst the VC’s who will only invest in ‘for benefit’ businesses.
    Business exists for the flourishing of life on the planet. We have created a false dichotomy between for-profit that makes money, and not-for-profit that does good (it is perpetuated by our tax structure). Businesses should have a triple bottom line: economic, social, and environmental sustainability. We have ALL the power over corporations by consuming from them, investing in them or otherwise using their services. We also vote in the politicians who make decisions about how much power they have. We need to shift corporate law (really only the last 30 years, and shift the demands of the consumer/voting base for an economic system that works in the long term. From a Christian perspective this is crucial! And WE have the power.
    Nelson said back in the 70″s “the economy is a wholly owned subsidiary of the environment”.
    Only in the Baby Boom generation has had just an economic bottom line. WWII gen did not know that destrying the environment was eventually going to destroy economic sustainability, but they certainly had a social bottom line.
    OK, must leave, but I spend my life in this subject, so it is hard…

  • Your Name

    The debate on diapers. Hmm…and that is just diapers. How many other decisions do we make in a year, month, day, hour…in our fast-paced society – can one actually make fully informed decisions? Surely, one can read, educate, research – important practice…but at the end of the day, there is no way an individual can do all the research behind every company, politician, lawyer, diaper decision. And…don’t get me started on research – I’ve had my fair share of ethical concerns involved in research.
    The statement that has impressed me so far is:
    “If you truly want to put your money where your mouth is – don’t buy THE STUFF. Drink tap water, listen to free radio, take public transport, and instead feed the hungry, clothe the naked and spend your free time visiting the sick and incarcerated.”

  • Your Name

    Scott, great subject to discuss, and one I’ve wrestled with myself. As a Scot, I’ve worked for a hedge fund, Merrill Lynch, a UK bank in corporate finance and other investment management firms. So I’ve seen first hand the “fat cat” and the risk excesses. And I’d agree with those commenters who would hold that business can be about more than profit maximisation, albeit surely the minute profit is removed from the process you no longer have a business. I left my career in finance to set up where we’re trying to put this into practice in Edinburgh. Ask me in a few years if it is possible…

  • Sheree

    If corporations were required to account for externalities (costs like environmental degradation, depletion of resources, etc.), the profits they report would be more realistic and management would be more inclined to move toward sustainability and “doing good.”