making the case for ethical business practiceSeptember 2003
A business that follows ethical principles should maximize long-term value, says Elaine Sternberg
It is difficult to make a business case for business ethics or corporate social responsibility, because in their conventional forms, both are profoundly anti-business. When, however, they are properly understood, the mechanisms by which they can enhance business performance become clear.
According to conventional notions, for a business to be ethical or socially responsible, it must subordinate maximizing owner value to the pursuit of some extraneous social welfare, environmental and/or religious end.
Since, however, the definitive objective of business is nothing but maximizing long-term owner value by selling goods or services, such views of the relationship of ethics and ‘social responsibility’ to business are oxymoronic: they make refraining from business the condition of being ethical or responsible in business.
Properly understood, business ethics is about what business must do to be ethical. The principles of business ethics are just those which must be respected for the business objective to be possible. In order not to be ultimately self-defeating, business must be conducted with honesty, fairness, the absence of physical violence and coercion, and a presumption in favour of legality. Collectively, these constraints embody what may be called ‘ordinary decency’. Classical ‘distributive justice’ is also essential. Rewards and responsibilities should be distributed on the basis of contributions to the organizational objective; productive workers deserve more than shirkers.
Business is ethical when it maximizes long-term owner value subject to distributive justice and ordinary decency. If an organization is not directed at maximizing long-term owner value, it is not a business; if it does not pursue that definitive business purpose with distributive justice and ordinary decency, it is not ethical.
Ethical conduct typically improves business performance, because business ethics has nothing to do with unproductive ‘do-gooding’. Instead, it requires that owner value be maximized, subject only to respecting distributive justice and ordinary decency. Unlike profits, long-term owner value reflects the indirect, distant, and qualitative effects of a business’s actions.
Unethical conduct may lead to short-term gains, but is unlikely to maximize value over the long term. The business that lies or cheats or steals, or breaks its promises, is difficult and unrewarding to deal with; it is unlikely to attract the best stakeholders or their best efforts. Even in the short run, unsatisfactory behaviour by stakeholders often results from unethical treatment of them. Treating stakeholders ethically does not, however, require equating them with shareholders, but respecting distributive justice and ordinary decency.
When business ethics is understood to require maximizing long-term owner value while respecting distributive justice and ordinary decency, it is entirely plausible that ethical conduct should enhance business performance.
(c) 2003 Elaine Sternberg
Elaine Sternberg is author of Just Business: Business ethics in action
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