If a board of directors sought to improve a given corporate function—strategy, marketing, or human resources—where would they begin? A common starting point would be to benchmark what the company does against a set of “best practices.”1
But what if “best practices” were not good enough? Ford Motor Company has long been a manufacturer of automobiles, but in recent years its board has realized that if they regard Ford as only a distributor of cars, it will not be recognized as a broader-based transportation company.2 The Ford board now seeks best practices in terms of helping to design transportation networks for metropolitan areas, rather than best practices to simply make and sell more vehicles. A company’s best practices thus depend on the template being used.
This analogy holds true today. Stakeholder demands—including those stakeholders called shareholders—press the agenda of corporate boards today very differently than they did, say, fifty years ago. Perhaps, as Norwegian investment banker Per Saxegaard argues, this is because the Internet provides a way for any interested party to have a voice, to capture a corporate indiscretion via a cell phone and immediately publicize it, and to organize a wide array of kindred spirits to put pressure on companies.
Companies need to make decisions about these issues. Are these decisions the domain of strategy? Philanthropy? Compliance? These issues could be called corporate social responsibility (or “CSR”), but even that name is unclear.
Practitioners and scholars differentiate among CSR, compliance, ethics, citizenship, shared values, and a host of other names for companies’ efforts to adhere to obligations other than maximizing short-term profit. When people tire of the criticisms of one name, they adopt another term to shed the baggage of the first. Whether the effort is contributing medicines to Third World countries or instituting a values-based model of human resource management, we use terms such as CSR and ethics interchangeably because a larger issue lies at the heart of these semantic debates.
Why should businesses pay attention to ethical and social norms? Is it because they will make more money for the business in the long run? Is it because companies will be more likely to comply with the law or perhaps to obtain more leniency from a prosecutor or a judge given a company’s conscientious history? Is it because people in a given company believe that integrity, trustworthiness, and authenticity have their own independent value worth pursuing?
These issues of trustworthiness, integrity, and compliance, as well as those of strategy, profit, and sustainability, are not new. They are the result of forces that have always affected companies. Some businesses ignore these forces; indeed, some of these forces can be minimized during certain times. Yet they do not disappear; a businessperson needs a template of these forces to navigate through what is going on today.
Drawing a Template
Illegal business behavior is not new, nor is unethical business conduct. As long as there has been trade, opportunities have existed for cheating. One need only look to ancient sacred scriptures to see the regulations and punishments set to deter cheating. Similarly, legal scholar Reuven Avi-Yonah has traced the notion of corporate social responsibility to Roman antiquity, arguing in part that governments provided companies with the benefit of limited liability in exchange for engaging in activities that benefited the public.3
Economists realize this as well. Nobel Prize–winning economist F. A. Hayek comments that if two people met in an isolated area, one party might kill or steal from the other; a person who could get away with it might just do that. However, to the extent that a community exists, sanctions will be imposed on the killer or cheater because it is not in the long-term self-interest of the members of the community to allow such behavior to occur. What is in their self-interest is encouraging productive behavior such as trading while discouraging killing and stealing. What fosters trade is for people to honor their promises, to tell the truth, to produce, and to sell high-quality products and services.4
It is arguably harder to pursue good virtues and profitable business today due to the rise of large business organizations combined with fluid global markets. Many commentators have noted that when management becomes separated from ownership, a new dynamic is introduced to corporate governance. A company with a dominant majority shareholder or a family-owned business will likely take on the values of the founder or owner(s).5 In such cases, the differences between the leader’s personal values and those of the company are not likely to be dissonant, and messages concerning appropriate behaviors will more easily flow through the organization.6
However, once companies undertake their initial public offering (IPO), the game changes. New investors enrich the company’s capital structure (as well as providing cash for the founders). These new shareholders possess the same rights to voice their views as the company’s existing shareholders with respect to how the company will govern itself. Many shareholders place a primary value on economic performance. At the same time, some companies do take steps to preserve their traditional way of doing business at the time of an IPO, and so some values—including noneconomic values—may persist in a company’s culture over a long period of time.
A prominent example of this is the legendary case of Johnson & Johnson (J&J). When the company made its public offering in 1944, the founders attempted to perpetuate the company’s (and founding family’s) values through J&J’s Corporate Credo, which set out duties and aspirations for the company, including service to, ranked in order, customers, employees, communities, governments, and finally to shareholders.7 The company conducted training programs around the Credo for decades, making it a criterion for hiring and promotion decisions as well as daily conduct for J&J employees.8 The pervasiveness of the Credo in J&J’s culture was given significant credit for J&J’s famous 1982 decision to remove its best-selling brand, Tylenol, from the dispensaries nationwide when an outside party sabotaged the product, resulting in six Chicago-area deaths.9 J&J’s CEO at the time, James Burke, explained that the company had to take such a drastic action because, without such action, “We couldn’t live up to the Credo.”10 At the time, that unforced recall was considered to be a questionable business action tantamount to admitting guilt, but over time it proved to be a brilliant defense of the company’s brand and its lead product.11
J&J’s action proved to the public that it was a company that people could trust, keeping its products safe for the public and standing behind its promises. Tylenol had been J&J’s best-selling product, producing 17 percent of the company’s net income in 1981.12 Two months after the recall, the company brought Tylenol back to the market with a market share that had plunged from 37 percent to 7 percent. A year later, the market share was back up to 30 percent.13
As admirable as J&J’s commitment was, it is a difficult orientation to maintain in a publicly held company. Institutional investors, day traders, or individual investors using various mutual fund options are more likely to be interested solely in monetary returns.14 Technology allows near instantaneous trading so that investors can move in and out of the market on an hourly basis.15 That opportunity furthers investors’ ability to evaluate companies on a very short-term basis. For such investors, monetary returns typically take priority over long-term strategies that emphasize values or corporate culture.16
In addition, investors from around the globe are likely to bring with them a diversity of values that may well challenge those that had been enshrined prior to a company’s IPO.17 And with 24/7 stock trading, the emphasis on ongoing evaluation of companies further enhances the importance of short-term monetary performance.18 According to this template, honesty and integrity are not highly rated.
In spite of these pressures, the aim to create strong ethical cultures persists, as well as the aim for these companies to be perceived as having a social conscience. Even in the midst of these acute pressures for financial performance, evidence also suggests that ethical corporate cultures are correlated to economic success.19 Lawmakers consistently pass legislation that attempts to rein in corporate excesses.20 The public and civil society continually press for more responsibility and more social engagement. We will discuss the moral reasons for this throughout the book, but it is important to delve further into the economic reasons for why ethics is important to business leadership.
ETHICS EMBEDDED WITHIN ECONOMICS
Four leading economists provide examples of the argument that at the core of economics is a noneconomic ethical dimension that foundationally allows economics to exist and allows trade to develop.
Adam Smith is at the forefront of this supposition.21 Smith, a moral philosopher, is most remembered for notions such as the “invisible hand” that creates social welfare even when “individual bakers and butchers” are acting from their own self-interest.22 Yet Smith also argues that those individual bakers and butchers fill roles as citizens of a society with moral sentiments and obligations for the well-being of that community.23 Businesspeople, in this light, are not only self-interested; they are also citizens concerned with obeying the law and being ethical.24
We have already introduced the Austrian economist F. A. Hayek, who took this connection a step further. Hayek argues that free trade benefits society in at least two ways. The first way pertains to how trade allows the production and accumulation of more material goods, creating a robust economy and the positive aspects that go with it (such as employment, better education, improved health).25 Second, Hayek also argues that increased trade leads to international peace.26 His argument is that trade creates relationships. Sustaining trade requires that those relationships be nourished by some straightforward ethical practices, such as truth telling, promise keeping, and the production of high-quality goods and services. This is one of the reasons that trade embargoes are so controversial. On the one hand, sanctions and embargoes provide a pressure point short of actual violence and so may provide the necessary pressures for changes without bloodshed. At the same time, the consistent lack of a trading relationship further isolates parties from each other, which may make subsequent peace-building efforts more difficult.27
A virtuous cycle can be created, Hayek argues, with parties recognizing that expanding trade requires such practices, which leads to more trade, which leads to a wider set of relationships, with a result that parties to a trading system will recognize both the value of sustaining the trade and also the ethical practices that sustain them. Both the trade and the ethical practices can logically lead to peace over war.
Part and parcel with the importance of trade, then, is ethics. Interestingly, Hayek’s position does not inherently value ethics. He values ethics primarily because it allows for this trading matrix to develop.28 Thus, his justification remains similar to that of the social welfare utilitarians, but Hayek delves deeper into the mechanics of the relationship. Hayek argues that the most efficient way for individuals to learn the importance of ethical practices is for civil institutions to teach such practices as having their own innate values; it is too inefficient for traders to learn this reciprocally supportive relationship through trial and error. Moreover, such inefficiencies mean that the knowledge gained will likely be after the fact and thus learned too late to benefit a particular exchange.29
A third example comes from the recent work of Robert Frank and David Rose. In his book Passions within Reason, Robert Frank argues that individuals make decisions on the basis of sentiments and emotion more than reasoned economic calculus.30 He states that “[those] who are sensible about love are incapable of it.”31 Like David Hume before him, Frank recognizes that our emotions tend to be our first clue to what we should do, ethically and economically, and those emotions must be part of our understanding of both.32
Similarly, David Rose has recently argued that economics cannot create social welfare on its own (neither can the law, nor politics).33 He emphasizes the need for ethics as a nonlegal, noneconomic discipline for restraint; guilt, he argues, can police aberrant behavior far more efficiently than economics or law and allows economic development to occur. As with the inefficiency and delay of learning the economic value of ethics through after-the-fact experience, guilt occurs too late to police behavior.34
Our view is that it is time to stop trying to argue that business can ignore ethical conduct and the society in which it operates. Whether a company is selling a drug, navigating offshore oil rigs, or running soccer tournaments, ethical conduct and being responsive to society matter. It is morally good for business to be ethical and socially conscious. It is also good economics and good for society. Simultaneously, businesses serve a social function—and behave ethically—when they convert resources into useful goods and services, the success of which is measured as a profit. Ethics and business are not an “either/or” issue; they are a “both/and” issue.
Today, it certainly seems that the public is increasingly intolerant of companies that seem to have little regard for society at large. In August 2015, Turing Pharmaceutical bought the rights to the drug Daraprim from Impax Laboratories for US$55 million. Daraprim is used in combination with other drugs to treat HIV patients; in the contract, Impax promised that it would remove Daraprim from pharmacies and wholesalers so that Turing possessed a monopoly on the drug. Martin Shredi, the CEO of Turing, promptly raised the price of Daraprim from US$13.50 to US$750 per dose, a 5,455 percent price increase, which instantly drew criticism from a variety of health-related organizations as well as politcians, including both Hillary Clinton and Donald Trump.35
Turing’s experience is neither the most recent nor the first iteration of such issues. Years ago, the famed moral psychologist Lawrence Kohlberg penned a hypothetical vignette about a man named Heinz, whose wife was dying of cancer. The medicine cost the druggist US$400 to make, and he charged US$4,000. Heinz could not raise the funds to purchase the drug, and the druggist would not sell it for less, raising a host of ethical issues, such as whether Heinz should break into the druggist’s business to steal the drug and whether the druggist was either coldhearted or believed that he could do more good for a greater number of people if he used his profits to create a bigger supply and wider distribution of the drug that would help more sick people.
More recently, the maker of the EpiPen, a medicine and injection system to provide emergency relief for someone suffering an allergic reaction, was found to have increased the price from US$249 to US$615 between 2013 and 2016, sparking outrage similar to Turing’s experience one year earlier.36 In contrast, Danish pharmaceutical Novo Nordisk has consistently won praise for its ethical conduct, including for its commitment to making its drugs available to everyone as a human right. This includes selling its insulin drug in Africa at no more than 20 percent of the average price in the Western world.37
After years of building its brand as “Beyond Petroleum,” BP found itself involved in the worst oil spill in U.S. history with the 2010 Deepwater Horizon disaster. Public relations gaffes, revelations of unpreparedness, and lax safety issues undermined the company’s reputation, and its CEO’s complaint that he “wanted his life back” raised public concerns of the sincerity of the company’s commitment to solving the crisis and its empathy with those affected.
Nonprofits are not immune from these troubles either. FIFA, the world soccer organization, has been embroiled in controversy for years ranging from the arrests of its leaders for violating bribery laws (related to the awarding of the World Cup venue to certain countries)38 to violation of human rights standards in countries building facilities in preparation for the World Cup.39
With each of these, the public’s outrage forced the organizations to react. Yet it seems that a better approach might be a long-term one in which ethical conduct is authentically integrated into company policies and sincerely practiced rather than reacting, after the fact, to a damaging scandal.
Many successful businesspeople do, in fact, see the positive connection between good ethics and good business. Although the news is often filled with scandals and outrageous businesspeople and their obsession with wealth and greed, it is at the same time not difficult to find leaders who agree with former Federal Reserve Chairman Alan Greenspan, who in congressional testimony stated that, in today’s economy, reputation is the key value companies bring to the market; if they lose that reputation, this can end the company.40 Greenspan’s remarks came on the heels of the turn-of-the-century scandals of Enron and WorldCom and were made with particular reference to the demise of Arthur Andersen.41
One need not search long for examples of companies with a clear social commitment, such as Ben & Jerry’s,42 Whole Foods,43 Timberland,44 and many others. Such commitments do not ensure ethical perfection, but these companies do explicitly and conscientiously set out to integrate ethical values with their business models. Rankings of the most ethical companies also note large multinationals; Marriott, Pepsi, Deere, Henkel AG, Kao, Swiss Re, and Stora Enso, among others, have been recognized multiple times in Forbes’s annual rankings.45
In short, the integration of law, ethics, and economics is possible in business practice, and that possibility only heightens demand for concrete implementation of such integration.
These arguments find empirical academic support as well. In an exhaustive study of over eighty other surveys that attempted to measure the relationship between corporate financial performance and corporate social performance, Joshua Margolis and James Walsh found that there was a weakly positive correlation between the two.46 That is, ethical conduct generally helps a company’s profitability, especially when measured over the long term.47 Companies can certainly be profitable without being ethical, but companies can also successfully integrate the two and even do slightly better financially when they do.48 Other large-scale studies corroborate these findings as well. One can conclude that, on the basis of traditional economists, actual business practice, and academic scholarship, there can be a constructive connection between ethics and economics. Establishing that connection becomes critical for the creation and nurturance of a healthy corporate culture.
LEGAL REQUIREMENTS MANDATING DESIRED PRACTICES
The old adage that one cannot legislate morality seems to have fallen on deaf ears among legislators, who regularly adopt laws with very specific moral agendas.49 This should not be especially surprising. Law and ethics may not be coterminous, but both seek to encourage certain behaviors and punish others. Although a central argument of this book is that the legal enforcement of moral values runs the risk of undermining the vibrancy of ethical corporate culture, the law does have a place in reining in unethical behavior. Many such regulations exist, and here are a few examples.
Europe’s commitment to protection of individual privacy led to the passage of the European Union (EU) Privacy Directive in 2002.50 The directive sought to protect EU residents from use of consumer data by businesses without their explicit consent.51 More recently, the Data Protection Directive was enacted to provide further privacy protection pursuant to seven principles: notice to data subjects that data are being collected; the stated purpose for any use; the preclusion of data disclosure without the subject’s consent; the security of stored data to prevent abuses; disclosure as to who is collecting data; providing data subjects access to their data with the right to make corrections to inaccuracies in the data; and making available measures for the subjects to hold data collectors accountable.52 Both directives were enacted pursuant to the ethical objectives of protections of privacy and human rights.53
Another specific European example pertains to gender issues. In 2002, Norway introduced a proposal requiring women to hold at least 40 percent of executive board positions by 2008.54 Similar legislation was then considered55 and passed56 by other countries as well. Here again, the laws were passed with the aims of promoting equality of opportunity for women as well as for human rights.57
Did these legislative efforts work? There are differences of opinion. Statistical goals were met in Norway, but some public companies delisted from exchanges to avoid having to comply with the laws. Our sense is that the lack of a definitive conclusion, however, will hardly preclude additional legal efforts to achieve the normative objectives of a democratically elected legislature.
In addition to specific regulatory approaches, countries also adopt reflexive approaches to achieve desired norms. Two notable examples are the 1991 amendments to the 1984 U.S. Federal Sentencing Guidelines58 and Burlington Industries v. Ellerth, which was decided in 1998 by the U.S. Supreme Court.59 These measures set out strong incentives for companies to adopt internal policies to achieve ethical corporate cultures. In Burlington Industries, the Supreme Court addressed issues pertaining to sexual harassment, holding that a corporation could be held financially responsible for the harassing activities of its employees. The Court also held that if corporations had established good-faith practices to address complaints and to train workers on what behavior was unacceptable, it could require alleged victims to work through the in-house process before appealing to the courts.60 Similarly, the Federal Sentencing Guidelines offered reduced financial punishments for companies convicted of federal crimes if the companies had adopted “effective” compliance programs, including codes of conduct, safe places for employees to make complaints, high-level internal oversight of the program, and self-reporting of violations.61 As with the European examples, the justificatory aims for these legal regimes were grounded in ethical aims.62
AFFECTIVE DIMENSIONS
If making companies behave is dependent on law, then one could turn to concrete notions of legal regulation rather than more ethereal notions of ethics.63 Robert Prentice has argued after the Enron and WorldCom debacles that the antidote to such problems was not more ethics in business schools (though Prentice, a highly respected professor of business law at the University of Texas, did not oppose such a proposal) but more law; after all, he said, what happened in these turn-of-the-century scandals was the flouting of extant law.64 Similarly, Aneel Karnani, a highly respected professor of strategy at the University of Michigan, argued in the Wall Street Journal that ethics was not a needed topic in business schools.65 If ethics “pays,” then strategy could easily handle its integration into business planning and perhaps do so better than philosophers.66
Perhaps it is, in theory, possible for corporate strategy or government legislation to handle all ethical issues confronting business. To date, however, the record does not suggest that they do so in any comprehensive way. Legislation perpetually reacts to the “scandal of the moment,” and although such reaction may be quite valuable to rein in egregious behavior, the law does tend to be slow and overinclusive, thus requiring supplementation to be more effective. Moreover, the fact that Enron, WorldCom, and others flouted the law suggests that there was insufficient motivation to respect existing legislation.67 Although corporate strategy may also be able to anticipate the market potential of moral sentiments, the record of quality management68 and environmental management69 tends to find their origin in noneconomic values that a social market asserts, in advance of an economic market finding a way to integrate the values into a business model.
We do not suggest that the study of ethics makes legislation and management irrelevant. Instead, we have proposed that these three be integrated, just as ethics and business themselves ought to be synthesized.70 An essential element of such an integration is some degree of affection: a “sincere desire to do good.” As we have already explained, economists argue that this element is necessary for economics itself to successfully function. We have argued for the efficacy of sincerity: that the optimal way in which ethics is effective is when moral actions are sincerely undertaken.71
Similarly, Harvard Business School’s Lynn Paine has argued for the concept of organizational integrity.72 Paine argues that employees simply are not motivated to comply with the law; one must build in aspirational quests—efforts to achieve ethical goods that have their own value independent of their profitability—to inspire them to attempt to reach the level of basic compliance.73 Linda Treviño and Gary Weaver studied the efficacy of legal compliance programs and found that they worked when notions of procedural fairness, at a minimum, resulted in evenhanded application of the relevant laws.74
An Industry in Point: Pharmaceuticals
As contrasted in the different approaches of Turing, Mylan, and Novo Nordisk, do corporations manage themselves solely for the benefit of shareholder profit, or should they consider the well-being of other stakeholders? The pharmaceutical industry is an example of one where an integration of business success and social consciousness might fit together nicely. The industry is ripe with examples of companies attempting to execute a strategy to do just that. Whether they are successful is another question.
Hank McKinnel, former CEO of Pfizer, which has been subjected to significant fines and other legal action over the past few years, captured the essence of the pharmaceutical response when he said: “Because we have the ability to help in so many ways, we have a moral imperative to do so.”75 It is hard to see how they could not. Their very business is about making people’s bodies, minds, and lives as a whole function better in a very real, concrete way. Nor is McKinnel’s comment inconsistent with other companies in the industry, which through statements or policies extend their commitment even beyond consumer well-being. Johnson & Johnson, GlaxoSmithKlein, Novartis, Abbott Laboratories, and others have made similar commitments to the good of environmental responsibility.76
Actions seem to follow these pronouncements. Eli Lilly has been a major funder of “diabetes camps,” in which children with type 1 diabetes are able to participate in traditional camp activities under the supervision of personnel equipped to deal with their issues. According to its February 13, 2013, press release, Lilly had donated more than US$20 million to these camps over the previous ten years and gives away much more to other projects. Much good has undoubtedly resulted from this action, and it should be recognized as good CSR, but, to put this in context, it is also worth noting that Lilly’s 2016 revenues totaled over US$21 billion.77
Likewise, Bayer’s 2016 revenues exceeded US$50 billion.78 These revenues were ample to support drug donations such as the “Medicines for Malaria Venture,” an organization created by the World Health Organization and financed by the World Bank,79 as well as the United Nations Environment Programme to organize environmental projects every year for young people.80 Its subsidiary, Bayer Cropscience, focuses on sustainable agriculture and has a program addressing African sleeping sickness.81
Following the same pattern, Pfizer’s 2016 revenues of nearly US$53 billion provided ample cash to fund its “Diflucan Donation Program” (donating antifungal medication in sixty-three countries) and other programs.82 The Lilly, Bayer, and Pfizer examples can be replicated. GlaxoSmithKline donates Albendazole as part of the company’s effort to combat the tropical disease lymphatic filariasis, a leading cause of permanent disability and disfigurement.83 Novartis donates multidrug therapy to all leprosy patients in the world through the World Health Organization, to date making contributions of more than 48 million packs valued at US$77 million that have helped cure more than 5 million patients.84 AstraZeneca participates in a program focused on hygiene, infection, and reproductive health in New Delhi, India.85 Boehringer Ingelheim provides free doses of a drug named Nevirapine to treat mother-to-child transmission of HIV.86 Bristol-Myers Squibb launched a five-year US$100 million program in 2010 to fight type 2 diabetes in the United States and pledged an additional US$15 million in 2012 to expand the program to China and India.87 Genzyme sponsors the Gaucher Initiative, a partnership with Project HOPE that provides the drug Cerezyme to patients with Gaucher disease who live in developing countries.88 Abbott formed a public–private partnership with the government of Tanzania to strengthen the country’s health care system and address critical areas of need, funding the program with more than US$100 million.89 In perhaps the most famous public–private partnership, Merck has donated millions of dollars’ worth of Mectizan to fight against and prevent onchocerciasis, also known as river blindness.90
Each donation may earn a press release touting the company’s commitment to society, but does each press release carry the same weight? In other words, how can these programs be compared to one another, or even measured against each other?
These examples lay bare one of our central concerns and point to where pharmaceutical companies could aim better. Which is more compelling, a philanthropic program or a commitment to the integrity of a company? Philanthropic programs play an important role in society, but the level of commitment and their impact is often difficult to measure. The number of people helped and the number of dollars spent are presented as proof of social commitment, but it is difficult to know how to assess the company’s true level of social commitment without the context of the number of people affected and the number of dollars earned. It is not that the philanthropic program is unnecessary; it is merely difficult to put into a measurable context. These are often stand-alone cases; because of that, companies can present such actions as evidence of how much they care while at the same time having such actions dismissed as window dressing by critics.
In addition to the difficulty of comparing numbers of people helped and dollars spent to revenues earned, CSR-as-philanthropy also makes “doing good” dependent on preexisting profit. This is an old criticism of CSR: A company can help only after it has first been profitable. Thus, profits come first and responsibility later. What does that do to responsibility during hard times? Is it passed over or discarded? Does such a model have any analytical basis in analyzing how profits have been made? If there is no model assessing these profits, could that then validate the claim that CSR-as-philanthropy really is just window dressing? These questions demonstrate that any kind of robust and sincere CSR must be more deeply embedded than philanthropy, even though philanthropy may be part of a robust strategy.
Philanthropic donations carry with them an appealing sense of altruism because of the equitable good done—treating children affected with worms, for example—but such donations are also vulnerable to the charge of window dressing because their impact is presented without context of dollars spent, revenues earned, and people helped. It is also sustainable only as long as the companies earn profits. Strategic CSR more deeply embeds practices that can address social issues—financial literacy and empowering those who do not use banking at all91—more sustainably exactly because the social issue is framed to help the company’s self-interest. Yet, this appears to turn ethics into just another business strategy, on par with offering a money-back guarantee. Shouldn’t ethics exist on a higher moral level? We seek to maintain the vibrancy of both philanthropic CSR and strategic CSR by articulating a paradox: The instrumental value of practicing virtues is at its highest when those virtues are practiced for noninstrumental reasons.
Why do firms engage in these activities? Marketing experts Kotler and Lee offer four reasons: it enhances corporate image; it feels good (which helps employee recruitment, motivation, and retention); it does good (increased market share or sales); and it has a lasting impact (increased appeal to investors and analysts).92 Companies may not engage in these kinds of activities for all four of these reasons; a firm may simply see benefits from just one or two of them. Yet the four reasons raise two important questions.
First, do the benefits cited by Kotler and Lee come from these philanthropic engagements, or do they result from a more systemic corporate approach to responsibility? Corporate support of efforts to alleviate disease and improve sanitation should, one would think, help a corporate image. A boost in reputation may also have an impact on some of the other factors identified by Kotler and Lee, such as employee recruitment and increased market share and sales. But would such engagements really help in, for example, employee retention? We suggest that it would do so only if combined with other corporate actions that appeal to everyday concerns of employees, such as how they are treated and how they are empowered in their work.
Second, Kotler and Lee’s four reasons beg the perennial question: Are these firms sincere in their efforts, or are their philanthropic efforts simply a public relations maneuver? This is not to demean good public relations, which are important to a company, or to suggest that companies must be wholly altruistic in their actions. Some degree of self-interest, of course, can be construed in any action. We are not suggesting that an ethical action is ethical only if that action shuns self-interest, but we do want to suggest that the more a company and the individuals in it are sincere about a long-term commitment to doing good, the more their actions become trustworthy and beneficial to the company’s instrumental consequences.
For example, two people may begin to work together knowing that each brings something to a project they both wish to complete. Each has an instrumental trusting of the other because there is a readily apparent self-interest in treating the partner decently to achieve the agreed-on objective. If one of them becomes ill, the other might care for the sick partner simply because a healthy partner is more likely to be able to make the necessary contributions to the project. However, there is a higher level of trust if the parties are authentically concerned about each other’s wellbeing, even beyond the instrumental goal of the particular project. That might make the healthy partner care for the sick one irrespective of the project. Again, the paradox is that the instrumental value of practicing virtues is at its highest when those virtues are practiced for noninstrumental reasons.
Stakeholders sense this as well. A company that engages in CSR activities as a slick PR move will not elicit as much value from those activities as if it is perceived as being sincerely interested in the activities. This is the fundamental, paradoxical complexity of CSR. There is more economic value when the economics are secondary to a higher moral or ethical motivation. Ultimately, then, a core question of any corporate social responsibility effort is whether the company cares. How does an artificial entity—such as a corporation—“care”? It does so by having a critical mass of individuals, especially at certain levels of the company, making it part of their personal identity and making it part of the institution’s identity.
This argument is not as far from business reality as one might think. In a conversation with a high-ranking manager of the human rights/supply chain division of a Fortune 50 company, one of the authors asked what academics can do to help the manager in his work. The author assumed that the manager would want more empirical studies of how an action had more business payoff but was surprised to hear the manager say instead that he needed good stories of how a company can help people. “Anyone who opposes what I suggest can come up with a different number,” he said. “But people still react to how company actions can impact other people.”
In short, our argument is this: companies know there is value in looking good. Economics itself suggests there is value in integrating ethics and economics. Yet the biggest value—and today’s leadership challenge—is to go beyond appearances and instead sincerely pursue responsible conduct as its own, independently valuable “good.” It is then that ethical conduct has its greatest potential payback. That task requires more than words. Our book offers a process by which it can come to fruition.
Plan of the Book
Chapter 2 sets out a model for trust building and integrity in business. It argues that one builds integrity in three ways: hard trust, real trust and good trust. Our model of integrity and trust does not end the analysis of how business should conduct itself in the twenty-first century. Instead, it puts into leadership terms the persistent forces that are always at work in business and provides a model through which we can assess how and why some businesses fail and others succeed.
Chapter 3 uses these foundational perspectives to examine corporate scandals over time. It looks to explanations that have been provided for why they happen and also looks at how and why these scandals occur. From the first two chapters’ framework of the forces affecting business, we examine how the companies failed to be trustworthy. This chapter draws heavily from our interviews with leading current and former CEOs and chairpersons and their observations of scandals. The chapter will also identify a number of key traits that seem to be associated with these scandals, with the goal of building a set of practical recommendations for how to avoid them.
In Chapter 4, we again use interviews with these executives and board members to examine examples of business behavior that have served as inspirational new ways of doing business. It looks to explanations that have been provided for why they happen and also looks at how and why these inspirational examples occur within the context of the opening two chapters’ framework.
In Chapter 5, we look at making good decisions. Whether applied to strategy, ethics, marketing, or anything else, good decisions require being aware of our own inherent, cognitive biases, being analytical and methodical and gathering facts, applying the best knowledge we have to date and relying on our own intuitions and sentiments. This chapter provides a framework for making decisions with a particular emphasis on values-driven governance.
Chapter 6 argues both that sincerity is crucial for good, sustainable business conduct and that business conduct itself is most trustworthy—and most economically efficacious—if the conduct is both done for sincere reasons and perceived to have been done for sincere reasons. Chapter 6 contains illustrative examples of strong corporate culture. It explains why culture is a crucial determinant for values-driven leadership.
Chapter 7 serves as a capstone summary for the recommendations developed throughout the book.
We aim to show that sincerely pursuing ethical conduct is a good thing to do and is most effective (and also profitable) when done for these independently good reasons. We hope to lead business executives to reinforce this idea, and we will conclude with specific steps for the integration of ethics into business on an even deeper level than what many best practices currently carry out.
1. The authors would like to acknowledge the assistance of several research assistants in preparing this article: Jason Allen, Mengxing Li, Chenxi Li, Christopher Oman, and Arturs Oganesjans.
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3. In early American legal history, incorporation was granted only when businesses demonstrated a social good that would occur through chartering; common examples included ferry services or the formation of municipalities. Reuven S. Avi-Yonah, The Cyclical Transformations of the Corporate Form: A Historical Perspective on Corporate Social Responsibility, 30 Del. J. Corp. L. 767 (2005).
4. See, for example, F. A. Hayek, The Fatal Conceit: The Errors of Socialism 47 (1988) (citing Hume’s contention that the market creates incentive “even [for] bad men to act for the public good”).
5. See, for example, R. Edward Freeman, Strategic Management: A Stakeholder Approach 240–242 (1984).
6. See R. Edward Freeman, The Politics of Stakeholder Theory: Some Future Directions, 4 Bus. Ethics Q. 409 (1994).
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8. Moore, supra note 7.
9. Id.
10. Id.
11. Judith Rehak, Tylenol Made a Hero of Johnson & Johnson: The Recall That Started Them All, N.Y. Times, Mar. 23, 2002, available at www.nytimes.com/2002/03/23/your-money/23iht-mjj_ed3_.html.
12. Id.
13. Id.
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23. Id.
24. Id. at 165–166.
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26. Id.
27. Id. at 41.
28. Id. at 13–14.
29. Id. at 74–75.
30. Robert Frank, Passions within Reason (1988).
31. Id. at 190.
32. Id.; see also Amy M. Schmitter, Hume on the Emotions, Stanford Encyclopedia of Philosophy (2006), retrieved on January 17, 2016, from http://plato.stanford.edu/entries/emotions-17th18th/LD8Hume.html.
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34. Id.
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46. See Margolis & Walsh, supra note 19 at 8, 13.
47. Id. at 10–14.
48. Id.
49. Although a close study of this phenomenon is beyond the scope of this paper, consider campaigns on prominent social issues such as the civil rights movement.
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51. Id.
52. Id.
53. Id.
54. Id.
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56. See, for example, Kenneth R. Ahern & Amy K. Dittmar, The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation, 127 Q. J. of Econ. 137, 147 (2012).
57. Although these numbers do appear impressive, there are reactions as well. Many Norwegian businesses privatized after the law took effect to avoid the requirement. Moreover, some have argued that, although the law may have increased the number of women in board seats, it has done little to increase the number of women in corporate executive positions. See Saleha Moshin, Quota System Failing to Bridge Norway’s Corporate Gender Gap, Bloomberg News (Oct. 9, 2013), available at http://business.financialpost.com/2013/10/09/quota-system-failing-to-bridge-norways-corporate-gender-gap/.
58. U.S Sentencing Commission, U.S. Sentencing Guidelines Manual (1984).
59. 524 U.S. 742 (1998).
60. Id. at 770 (citing DeGrace v. Rumsfeld, 614 F.2d 796, 805 [1980]).
61. U.S. Sentencing Guidelines Manual.
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66. Id.
67. Prentice, supra note 63.
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71. Id.
72. See L. S. Paine, Value Shift: Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance (2003).
73. Id. at 111.
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76. Id. at 25.
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92. Nussbaum, supra note 75.
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