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A case for ethics

AUTHOR: Marc Orlitzky   DATE: 30.08.01   ISSUE 2, 2001

Some say moral values are the ties that bind society. Nevertheless, recent examples of some dubious practices by Australian business for short-term financial gain illustrate some individuals’ beliefs that the term ‘business ethics’ is, perhaps, an oxymoron. At a time when there is no shortage of unethical business practices that put people in harm’s way, it is useful to spell out the meaning of business ethics. The concept of business ethics is the application of moral philosophy to issues in business. Its goal is to describe morally good behaviour for managers and corporations. Thus, the field’s domain includes macro and micro issues because the study of moral principles can help us understand how conceptions of duty evolve in society and how managers can tangibly fulfil their responsibilities in line with societal expectations.

Most ethical duties are variations on the theme of ‘do no harm’ and are called ‘negative duties’. Other duties are stronger in that they advocate behaviour that assists others in achieving their good. These ‘positive duties’ manifest themselves in actions typically identified as corporate citizenship, social responsibility or stakeholder engagement. Of course, in this context, the adjectives ‘negative’ and ‘positive’ do not carry any evaluative connotations whatsoever. One high-profile approach to negative and positive duties is triple bottom line accounting, which assesses an organisation’s economic, social and environmental impacts. However, the highly publicised and idealistic goal of triple bottom-line accounting is far from being realised in Australian organisations today.¹

Why do organisations need an understanding of ethics?
Regardless of whether organisational constituents (including customers, governments, activists, etc.) expect only negative duties or also positive duties, managers and business scholars often regard the underlying value processes, such as the implementation of equal employment opportunity, as costly exercises. Increasingly, though, the new generation of business leaders is recognising that value processes are in fact social processes through which the organisation, arguably the most important of all social systems today, is held together.² Therefore, ethical and/or socially responsible behaviour can be considered an investment in transparency, integrity and trust which, in turn, can help reduce transaction costs within and across organisation.

{	The first step in any implementation effort should be a responsibility audit.

On the one hand, any ethical system can be regarded as self-referential. This means that ethics has a unity "for itself, independent of the cut of observation by others."³

Whether a manager sees ‘the good’ as superior pollution abatement, employee development programs, equal employment opportunity, respect for all stakeholders, honesty or community engagement, the good is a compelling duty – in and of itself. Our humanity makes ethical behaviour the only right choice. Ethics must not be justified by something else that is either the result or psychological motivation of moral behaviour.

This ‘in and of itself’ approach is very different from the teleological (that is, consequentialist) reasoning of utilitarianism, a paradigm on which the business school core disciplines of economics and finance rest. Teleological reasoning would say: “Pursue the good as long as it is consistent with the raison d’être of an economic organisation, which is to maximise shareholder wealth.” Typically, this type of thinking leads to a number of decision-making biases and flaws because it tends to be rooted in normative myopia.⁴ In so-called “value-inert cultures”,⁵ economics-based utilitarianism can become firmly entrenched. Therefore, we must be careful when justifying ethical practices or social responsibility with the truism, 'good ethics is good business.'

Ethical practices are nowadays often justified with reference to their positive impact on morale. With this perspective, the philosophical charge that ethics is merely a means to some other overarching end beyond ethics still applies. Whether the goal is economic or humanitarian in nature does not fundamentally alter the logic of ethicists’ concerns. If teleological justifications were the only ones available, managers would be encouraged to pursue ethics only when there is a significantly positive relationship between ethical practices and that overarching goal. And when you think about it, how often does morality really serve as the glue of social integration? Taking morality seriously also implies the acceptance of its frequently divisive consequences (for example, honesty, affirmative action or reverse discrimina-tion). ⁶ Furthermore, if we tried to deduce the goodness of ethical practices from empirical observations of possible consequences, we would commit what philosopher G.E. Moore termed the ‘naturalistic fallacy’.⁷

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The business of ethics Buddhist teacher Sogyal Rinpoche with professor Micheal Vitale, dean at the AGSM.

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(L-R Sogyal Rinpoche, Prof. Micheal Vitale)

Quite distinct from the ‘in and of itself’ and teleological approaches to ethical and/or socially responsible behaviour is the sociological explanation for the adoption of ethical practices. It is based on the sociological insight that without pronouncing and implementing a stakeholder rhetoric, a business may become a pariah, an anomaly, endangering its social legitimacy and, thus, its existence in today’s complex and dynamic business environments. These frequently powerful societal and environmental forces are called institutional pressures, which can lead to normative commitments among managers.⁸

Normative commitments, especially when they are based on the need to conform to broader social movements and trends, may remain unexamined in the light of a company’s particular market and non-market situation. Of course, sometimes it is unavoidable to adjust to institutional norms if they are in the form of national or international regulations. In the environmental arena, however, managers have often adopted ‘best practice’ behaviour or processes from other countries or even other industries, without thinking deeply enough about the strategic significance of those practices in the context of the company’s particular circumstances.

In a world that has lost its belief in an absolute or universal moral code, societal ethics are transformed into relativist social rhetoric and behaviour. Without an understanding of how various stakeholder groups interpret ethical obligations (which are often regarded as social commitments), a company can easily become trapped in a swirl of self-appointed vigilantes representing utopian socialist rhetoric – from anti-property rights to anti-globalisation.⁹ Activists often use the mass media in a clever way, and organisational reputations stand and fall in the eyes of the media, which often act as the informational intermediaries between the organisation and its various stakeholder groups. Therefore, companies need to adopt a strategic, media-conscious attitude toward the management of social issues. A better understanding of the semiotics of morality is necessary, but not sufficient to stem the growing flood of employee and consumer dissatisfaction with ‘business as usual’. The implementation of good corporate citizenship will become essential to success.

How can business leaders and organisations implement ethical and socially responsible behaviour?
The short answer is ‘strategically’, paying attention to a company’s unique internal and external relations with all stakeholder groups. The answer is to act in the nonmarket domain with the same strategic fervour that is practised in the market realm (thanks to strategic management writers such as Michael Porter, Nitin Nohria and many others). What makes operating in the non-market realm a bit more difficult is that behaviour that does not appear strategic tends to be rewarded more. In the current social climate in Western societies, altruism is still morally superior to rational self-interest.

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Buddhists see compassion not only for the benefit of others, but for the benefit of personal happiness.

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If the objective is to act strategically without appearing so, then where can managers start to make changes individually? Simply by changing their mental attitude, as Buddhist master and author Sogyal Rinpoche pointed out in his Values-based Leadership presentation at the AGSM earlier in the year. He entreated business leaders to become “mindful” by overcoming the “jaws of ego”, which he defined as hope (expectations) and fear. Through meditation, individuals could gain a deeper understanding of the nature of the mind and the importance of compassion, he said. Buddhists see compassion not only in the service and for the benefits of others, but also in the service and for the benefit of personal happiness.¹⁰

Probably everyone can agree with the statement by the Dalai Lama that “the very purpose of our life is to seek happiness”.¹¹ In the 21st century, people will increasingly expect to practise their personal, often spiritual values in the workplace. More and more individuals will want to pursue self-actualisation at and through work.¹²

There are a number of examples that illustrate organisational implementation of ethics and/or social responsibility. For example, under the leadership of its new chairman Bill Ford Jr., Ford Motor Company has begun to embed the value of sustainability in its operations. The health supplements supplier Blackmores has received accolades from Australia’s St James Ethics Centre for its transparent business practices and exemplary treatment of employees. BHP has recently changed its ways by committing itself to integrity, open communication and more opportunities for women in top management.

To specify the relationship between ethical practices (in their strong form) and corporate financial performance in a study that would go beyond illustrative cases, I quantitatively integrated all available studies on corporate social responsibility and financial performance in several meta-analyses. My own research on corporate social performance was not driven by the desire to justify corporate social responsibility and ethics by bottom-line concerns. Instead, it constituted an effort to investigate moderators of the relationships and show empirically to what extent large and small organisations can reap financial benefits from the fulfilment of companies’ negative and positive duties. The meta-analytic data set included over 33,000 observations.The implications of my meta-analyses as they concern implementation are as follows:¹³

The frequently invoked trade-off between social and financial performance is a false dichotomy, which is not reflected in empirical data. Instead, the evidence points to a positive relationship between social performance and accounting rates of return (such as ROA, ROE; weighted true-score correlation ρ of .42) and between social performance and market returns (true-score correlation ρ of .15).The overall relationship between social and financial performance was .36.

Corporate reputations are a major factor in positive social-financial performance relationships (high ρof .73).Therefore, it is essential that a company focus on, and analyse, three aspects of a social issue: ¹⁴

1. The institutionalisation of an issue (that is, its stage in the issue life cycle);

2. The visibility of ethical and socially responsible behaviour to stakeholders;

3. The corporation’s publicity efforts, which are tasks typically carried out by communications and public affairs departments. Employees in these areas need training not only in communication, but also in sociology, public administration and business ethics. Proper employee selection procedures are crucial. Outsourcing these publicity efforts to PR firms are counterproductive because it would prevent nonmarket activities from becoming firmly embedded in a company’s strategic thinking and culture. In other words, outsourcing could squander competitive advantages. Furthermore, to some extent at least, all company employees need to consider themselves ‘boundary spanners’ between the organisation and its social environment.

In the last 30 years, the financial benefits from good environmental performance were negligible (ρ of .12). (The benefits may or may not be higher in the future.)

On the one hand, high corporate financial performance is caused by a reputation for high social performance. On the other hand, high social performance is caused by high financial performance and the availability of surplus resources. In other words, there is a bidirectional relationship.

The increasing social influence of media and other intermediaries in organisational networks (both in company-consumer and company-investor relations) must be acknowledged and used as a strategic lever. Organisations of all sizes can financially benefit from corporate social performance.¹⁵

The relatively large cross-study variance suggests that businesses must analyse their specific market and non-market situation before embarking on any major ethics or social responsibility campaign. Ethics and social responsibility should not be based on whims, impulses or intuitions.

Market mechanisms may encourage corporate social performance. Government regulation might be impractical, superfluous or even inefficient because social and financial performance are self-reinforcing over relatively brief time periods (less than a year). However, governments ought to pay close attention to poor financial performers (such as organisations close to bankruptcy). My research indicates that these organisations face formidable temptations to behave unethically (which is understandable, but not excusable).

The first step in any implementation effort should be a responsibility audit.¹⁶ Vision and mission statements by themselves are meaningless. Rather, all core business practices should be analysed from time to time in order to examine the consistency of actual behaviour with espoused values. During the last few decades, cynicism about organisational activities has become so widespread in society that many organisational stakeholders tend to discount corporate disclosures about their responsibility and ethics and, thus, fail to reward organisations for such disclosures (ρ of only .11 between social and financial performance).

In the final analysis, it may be best to have reliable, independent auditors who understand measurement issues in designated functional areas (such as human resource management, environmental practices, quality systems, community relations, etc.).¹⁷ To ascertain that corporate values are not as easily abandoned as personal New Year’s resolutions, internal and external stakeholder satisfaction must be recorded and analysed.¹⁸

Intangible assets such as culture, values and leadership must occasionally be made explicit in tangible measurement and analysis. My research indicates that you are not throwing good money after bad if you decide to invest in a responsibility audit. An in-depth understanding of the perceptions of all organisational stakeholders (including the customer) is the first step of a proactive, integrated business strategy¹⁹ that will allow a company to grow despite increasing nonmarket challenges.

*Dr Marc Orlitzky is a lecturer in organisational behaviour at the AGSM.

Footnotes
1. The term ‘triple bottom line’ has been coined by John Elkington in his book Cannibals with Forks: The Triple Bottom Line of 21st Century Business, 1997. That this concept is not even close to being implemented has been established in David Birch and Jonathan Batten’s study ‘Corporate Citizenship in Australia’, 16 May 2001, presentation at Museum of Sydney; Corporate Citizenship Research Unit, Faculty of Arts, Deakin University.

2. On value processes, see D.L. Swanson, ‘Addressing a theoretical problem by reorienting the corporate social performance model’, pp. 43—64, Academy of Management Review, vol. 20, no. 1, 1995; and W.C. Frederick, Values, Nature, and Culture in the American Corporation, Oxford University Press, New York, 1995. I briefly outline the value processes on page 9 of my Centre for Corporate Change paper, ‘Corporate social performance: developing effective strategies’, Research Brief RB004, 2000. This paper is available from Fran Prior, secretary, Centre for Corporate Change, AGSM, Tel: (02) 9931 9500, Fax: (02) 9663 4672, e-mail: franp@agsm.edu.au.

3. N. Luhmann, Social Systems, (translated by J. Bednarz Jr and D. Baecker), Stanford University Press, Stanford, CA, p. 33, 1995.

4. The term ‘normative myopia’ is discussed in D.L. Swanson, ‘Toward an integrative theory of business and society: a research strategy for corporate social performance’, pp. 506—521, Academy of Management Review, vol. 24, no. 3, 1999. Diane Swanson and I have developed a research program that will empirically examine the dimensionality of normative myopia and its antecedents and consequences.

5. D.L. Swanson, ‘Toward an integrative theory of business and society: a research strategy for corporate social performance’, pp. 513—514, Academy of Management Review, vol. 24, no. 3, 1999.

6. N. Luhmann, Social Systems(translated by J. Bednarz, Jr and D. Baecker), Stanford University Press, Stanford, CA, 1995.

7. G.E. Moore, Principia Ethica, Cambridge, Cambridge University Press, 1978 (First edition 1903). See also M. Orlitzky and D. Jacobs, ‘A candid and modest proposal: the brave new world of objectivism’, pp. 656—658, Academy of Management Review, vol. 23, 1998.

8. A seminal study of institutional forces is: P. Selznick, TVA and the Grass Roots, University of California Press, Berkeley, 1949. Other studies of institutional pressures can be found in: W.R. Scott, Institutions and Organisations, Sage, Thousand Oaks, CA, 1995; A. J. Hoffman, ‘Institutional evolution and change: environmentalism and the US chemical industry’, pp. 351—371, Academy of Management Journal, vol. 42, no. 4, 1999.

9. K.A. Elliott and R.B. Freeman, ‘White hats or Don Quixotes? Human rights vigilantes in the global economy’, NBER Working Paper 8102, National Bureau of Economic Research, Cambridge, MA, 2001; http://www.nber.org/papers/w8102; N. Klein, No Logo: No Space, No Choice, No Jobs, Flamingo, London, 2000.

10. Sogyal Rinpoche introduced this notion of ‘enlightened self-interest’ on various occasions in his talk. A more detailed description of this process is given in: H.H. the Dalai Lama and H.C. Cutler, The Art of Happiness: A Handbook for Living, Hodder, Rydalmere, NSW, 1998.
11. The Dalai Lama in a presentation in Arizona, cited in: H.H. the Dalai Lama and H.C. Cutler, The Art of Happiness: A Handbook for Living, p. 13, Hodder, Rydalmere, NSW, 1998.

12. Business scholars think that organisations will not be able to survive in the new millennium’s competitive marketplace unless they are values-based organisations infused with best practices of spiritual motivation:

12. Mitroff and E. A. Denton, A Spiritual Audit of Corporate America: A Hard Look at Spirituality, Religion, and Values in the Workplace, Jossey-Bass, San Francisco, CA, 1999. See also R. Lewin, and B. Regine, The Soul at Work, Simon & Schuster, New York, 2000; and R. Barrett, Liberating the Corporate Soul: Building a Visionary Organisation, Butterworth-Heinemann, Boston, 1998.

13. More detailed articles are available: M. Orlitzky, ‘Corporate social performance: developing effective strategies’, Centre for Corporate Change, AGSM, Sydney: Research Brief RB004, 2000. This paper is available from Fran Prior, secretary, Centre for Corporate Change, AGSM, Tel: (02) 9931 9500, Fax: (02) 9663 4672, e-mail: franp@agsm.edu.au. See also: M. Orlitzky, ‘Does organisational size confound the relationship between corporate social performance and firm financial performance?’, Journal of Business Ethics, in press; ‘Corporate social performance and generalisability theory: an outcome-based measure of stakeholder satisfaction and its measurement implications’, annual meeting of International Association for Business & Society (IABS) in Sedona, AZ, March 2001; reprinted in IABS 2001 Proceedings; ‘A meta-analysis of the relationship between corporate social performance and firm financial performance’, doctoral dissertation (1998), The University of Iowa, Iowa City, IA, UMI no. AAT 9904332, DAI-A 59/09, p. 3527, March 1999. The following, related studies have been presented at various management conferences and are under review at business journals: M. Orlitzky, F.L. Schmidt and S. Rynes, ‘A meta-analysis of the relationships between corporate social performance and financial performance’; M. Orlitzky, and J.D. Benjamin, ‘Corporate social performance and firm risk: a meta-analytic review’.

14. In one of my AGSM courses, these three aspects of non-market activities are discussed further: MNGT4183 Non-market Strategies: Business & Society, next offered in term 3, 2001 (September—November).

15. M. Orlitzky, ‘Does organisational size confound the relationship between corporate social performance and firm financial performance?’, Journal of Business Ethics, in press (tentatively scheduled for publication in vol. 33, no. 2).

16. S. Waddock and N. Smith, ‘Corporate responsibility audits: doing well by doing good’, pp. 75—83, Sloan Management Review, vol. 41, no. 2, Winter 2000.

17. As some operational and reputation problems have illustrated at The Body Shop in the mid-1990s, internal audits may be regarded as less than honest by various stakeholders. The AGSM (through the Centre for Corporate Change) and some consultants, too, offer responsibility audits. For further inquiries regarding responsibility audits, please contact Dr Marc Orlitzky directly, Tel: (02) 9931 9437, e-mail: marco@agsm.edu.au, or Fran Prior, AGSM, Tel: (02) 9931 9500, Fax: (02) 9663 4672, e-mail: franp@agsm.edu.au.

18. M. Orlitzky, ‘Corporate social performance and generalisability theory: an outcome-based measure of stakeholder satisfaction and its measurement implications’, annual meeting of IABS in Sedona, AZ, March 2001.

19. D.P. Baron, Business and its Environment (3rd edition), Prentice Hall, Upper Saddle River, NJ, USA, 2000. The aforementioned AGSM course Non-market Strategies: Business & Society, presents an introduction to the integration of market and non-market strategies.