An Ethical Business Climate, or a Business Climate of “Ethics”?

Both Aristotle and New York State Attorney General Eliot Spitzer have tried to improve societal ethics. Aristotle has not made as many headlines recently.

(The following is an edited version of a speech delivered on May 20, 2005 to the Economic Club of Traverse City by Christopher F. Bachelder, director of communications for the Mackinac Center for Public Policy.)

Surveying the landscape for breakdowns in business ethics, we currently have an embarrassment of riches. There’s Martha Stewart, fresh from prison. There's the legal campaign by Eliot Spitzer, the attorney general of New York, who has successfully prosecuted a number of Wall Street figures and today seems to have Hank Greenberg of AIG and possibly even Warren Buffett in his sights. And far from Wall Street, there’s Harry Stonecipher, who just got bounced from the CEO position at Boeing Aircraft for his romantic involvement with a company executive. And, of course, there remain the more famous scandals that have entered the maturity phase of their news cycles, such as Tyco, Worldcom, HealthSouth, Adelphia and the mother of all frauds, Enron.

I want to divide this talk into two main parts. In the first part I want to answer the question: Why do we have this confluence — this sudden emergence of dirty laundry — and what should we do about it? Let me start by discussing one theory that I’m skeptical of, but that is popular among many political partisans and is instructive to consider: the argument that it’s pretty much Bill Clinton’s fault.

According to this view, why should we be surprised if a lot of less-than-honorable people in the upper echelons of corporate America concluded they could cut corners when Americans were willing to accept Clinton’s scandalous behavior just because the stock market was booming? If a national message is broadcast that "everyone does it," the people who don’t join in just look like suckers or prudes.

I promise not to dwell on politics in this speech, and I hope my comments on this will strike you as primarily analytical rather than partisan, since I didn’t vote for Bill Clinton. I would also add that I have three daughters, and I want them to be able to operate in a workplace with decorum and decency. I shake my head in disgust at an article in last month’s New York Daily News titled, "An Intern’s Life in DC: Grandads Hitting On Me."

Nonetheless, the first problem with the "Bill Clinton" thesis of corruption is that corruption has been around awhile. As I’ll mention again later, American business ethics are periodically found wanting, as they were in the 1930s, and our former president had nothing to do with it.

Second, I think many Republicans were so beside themselves with how Clinton managed to keep the support of the American people throughout the impeachment process that they became convinced it reflected a collapse of national morality. They didn’t see what I think was probably true instead: that Bill Clinton’s job approval ratings — which, of course, were much different than his personal approval numbers — stayed high not because the American people approved of his morals, but because the American people didn’t support the means that were used to expose his moral failings. They were put off by laws on sexual harassment and independent counsels that seemed to come from the Spanish Inquisition.

This leads me to think that at best, the jury is out on the Bill Clinton explanation. Still, I believe the episode does reveal something important about ethics generally, and business ethics in particular, so I’m going to come back to it a bit later.

For the moment, though, I want to return to my original question: What does account for our apparent "crisis" in business ethics today?

Looking back at history, I would suggest that you frequently encounter outbreaks of these things immediately following a period of substantial financial dislocation. After the stock market collapse of the early 1930s, a number of scandals emerged: Richard Whitney, the president of the New York Stock Exchange, went to prison for embezzlement; Sam Insull, a utility executive, was a name as familiar then as Ken Lay’s is today; and some of the bankers and Wall Street financiers who committed suicide after the crash believed themselves to be just one step ahead of a subpoena.

Yet there were probably as many people doing unethical things in the ‘20s; they just managed to fly under the radar because of the rising market. Economic reversals in the early 1930s brought these practices to light in much the same way that the collapse of the Internet bubble has illuminated our current problems.

So we need to guard against the danger of letting these financial anomalies and their underlying economic drivers trick us into thinking that the problems that were revealed by a collapse in asset values are due to a general decline in morals. One of the least-remarked and most pernicious aspects of the Great Depression is how a subsequent generation of historians more or less created a narrative that personalized the catastrophe. Responsibility for the crash was attributed to "villains" and "reactionaries," while the eventual recovery was credited to "heroes" and "reformers." Not surprisingly, people who held certain beliefs were associated with the villains, while people who held opposing views were associated with the heroes. In fact, this narrative is not really different from the "Blame Clinton" thesis, except that the viewpoints associated with the "heroes" and "villains" would generally be reversed from after the crash.

Another field where the "dislocation" thesis might well apply is in mainstream journalism. There have been a spate of high-profile journalistic ethics problems lately: Jason Blair’s falsifications at The New York Times; Dan Rather’s story about Bush’s National Guard "documents"; Newsweek’s recently recanted Koran desecration reporting; and a number of others. Here in Michigan, we know about the spot that Mitch Albom got into with his column about the former MSU basketball players attending the NCAA tournament. I think the Albom lapse is small in comparison to the other national cases I mentioned. But I can understand why the Free Press did what they did. They were protecting their brand image in a declining market. The business model and the readership franchise of the major newspapers and other mainstream media are under significant stress. A couple of weeks ago, there were new figures released showing how dramatically circulation is declining at the nation’s major newspapers. Their leadership is unsure what to do about it, but they know they can’t afford to lose credibility.

The challenge at such times is not to go overboard. There are some signs that this is becoming a problem with New York Attorney General Eliot Spitzer’s current campaign. Spitzer began with an effort to end hidden practices on Wall Street that favored certain investors in mutual funds. In this I would actually defend what Spitzer did: He has performed a service for the capital markets and thus the country by challenging the practice of giving preferential treatment to some investors by allowing them to trade funds based on stale prices after the markets had closed. His actions in these cases seem to me to be justifiable regulatory action to ensure fair and open markets.

But in late March, The New York Times ran a story that described how two investment bankers were fired for doing something that five years ago they might have been fired for not doing — specifically, offering their services to a company that they had been told was considering a merger. We also have to recognize that despite the good Spitzer may have done so far, he faces a very real political temptation to abuse his power to make a name for himself and run for higher office.

I know that you’ve invited Michigan Attorney General Mike Cox to speak to the economic club later this year, so I say this with some hesitation, but it’s a standard joke throughout the 50 states that "AG" doesn’t stand for "attorney general." It stands for "aspiring governor."

Consider, for instance, Rudy Giuliani, who as a U.S. attorney worked the same territory as Spitzer currently patrols. Giuliani is now famous as the former mayor of New York City, but he made his name in the 1980s by putting the financier Michael Milken in jail. Though Giuliani a few years ago called on the president to pardon Milken (who spent 22 months in prison in the early 90s), real criminals such as Ivan Boesky were let off easy in order to harpoon the big fish, which was Milken. And while Milken must have gotten bad grades in Kindergarten in the category "plays well with others," the details of how he was brought to plead guilty aren’t pretty.

We shouldn’t forget that even if Milken was guilty of what he pled to (which, by the way, was not insider trading), he wasn’t a popular guy with the powers-that-be. The dislocation he brought to Wall Street and corporate America was the most wrenching of the 1980s. The major beneficiaries of this dislocation were the kind of people who couldn’t get their kids’ weddings written up in The New York Times and who had previously been completely shut out of the credit markets. These people were interlopers, and Milken was the guy who enabled them to crash the party. Politically speaking, no one was going to defend him, so he was a pretty easy target, especially after it was reported that one year he made over $500 million dollars. As the joke goes, this was back when $500 million was a lot of money.

To conclude the first part of my remarks, I want to make a couple of observations about the two theories I’ve discussed on the cause of the apparent ethics crisis today. As I said, I don’t find the Bill Clinton thesis convincing, but I do draw a lesson from it. It involved sexual harassment, a prevalent issue in business ethics in the 1990s. To deal with this problem, we developed increasingly activist legal remedies. Note that this general response led to the disconcerting result that the president of the United States was asked to testify under oath, under charged and even partisan circumstances, about a number of his past relationships — and to do so in excruciating detail. The spectacle was so unpleasant that many people who would never personally tolerate similar behavior from one of their associates or employees were willing to let the president of the United States keep his job.

So I would suggest we consider the possibility that dealing with a problem like this requires a different approach. Ultimately, even though legal and political processes are important, they shouldn’t be allowed to crowd out the voluntary workings of civil society in maintaining standards of culture, manners and individual responsibility. Thus, it might be more effective to encourage a robust common culture that spotlights and stigmatizes bad behavior without necessarily calling in the lawyers or demanding a new act of the Legislature.

After all, as I suggested a few moments ago in my discussion of how crises of business ethics tend to follow financial upheavals, there is always the possibility that society will not just punish wrongdoers, but will become overly punitive in a desire to find scapegoats. Public officials, who tend to follow and reflect public opinion, have particularly strong incentives to do this, and they have "the law" behind them. The result may involve excessive punishments and, just as problematically, distract people from the true causes of the financial dislocation that precipitated the crisis. The idea that bad-guy financiers and stock market brokers caused the Great Depression, for example, just isn’t going to help society avoid the next big economic crash. In this sense, even a heated cultural debate may be much more productive and educational than another prosecution.

So if we might do better leaving many business ethics issues to the private sector, this brings me to the second portion of this speech, which will address the question of how the corporate class should handle business ethics. Given the number of current public problems in this area, we would expect the business schools to be gearing up a major effort in response.

I’ve done some cursory research into the courses now being offered by graduate business programs. I can report that these courses appear to be more self-contained and explicit than was typical when I was earning my MBA, but they also reflect some limitations that are not unusual in our society: In particular, they are inordinately focused on process. They are primarily concerned with how to get managers to act, and pedagogically, they focus on how managers can implement an ethical culture. Under such an approach, business ethics becomes more an extension of business practices than of ethics itself.

The most limited of such classes are focused on behavior, in much the same way that you install an underground electric fence at the edge of your yard and put a collar on your dog to keep it from leaving your property. When the dog gets too close to the edge of the yard, he receives an electric shock, so he learns not to go too close to the edge of your property. You don’t really expect to create an ethical dog, because you don’t believe the dog can actually understand what ethical behavior is. Instead, you’re simply trying to keep the dog from wandering off your lot and perhaps getting hit by a car or digging up the neighbor’s flowers.

Now I’ll grant that the task of creating and maintaining an ethical environment isn’t trivial, and I suppose that it’s natural that business schools will be oriented toward the practical challenges of making something happen. But in my experience, it’s the content of ethics that’s harder for complex and diverse organizations to truly fathom. In any event, I’d contend that a well-implemented regime of faulty content will create more problems than does a poorly implemented program of good content.

Of course, a definition of "good ethics" isn’t easy to arrive at or to agree on. People will inevitably have conflicts over what is morally good and bad.

But the difficulty we’ll have in coming to agreements in a diverse and pluralistic society isn’t a reason for discounting the importance of these judgments or adopting a purely relativistic approach that refuses to set priorities.

As a simple way of thinking about this, imagine that you and I have a business lunch at which I order Diet Coke and you order iced tea. In most cases, there’s no ethical component to these two choices; they just reflect our preferences. But consider further that after we finish our drinks, I notice there’s a $5.00 bill on the table next to us that was clearly left as a tip for the waitress. If I take the $5.00 bill and place it in my pocket, we wouldn’t say I simply have a greater preference for money than you do. Rather, by focusing on ethical content, and through the construction of a moral vocabulary, we can agree that my action is morally wrong.

Of course, most moral content will not be this easy. Business Ethics Magazine was recently about to give McDonald’s an award for ethical conduct, but reconsidered when People for the Ethical Treatment of Animals questioned the company’s business practices.

Now, I have some personal experience with PETA — and more importantly, an understanding of what their values and worldview are — and these lead me to discount PETA’s judgment in this case entirely. Many of you, however, might well disagree with me. I would suggest that this disagreement only reinforces the importance of developing a rigorous and well-grounded set of ethical principles before we spend too much time thinking about how to implement them.

The good news is there are several business schools which seem to be inclined to address this challenge directly without fuzzing it up. Notre Dame, for instance, is one school that appears to recognize the need to rigorously define and analyze what constitutes ethical conduct. Coming to this understanding and constructing a vision of what is true and good — in other words, what is ethical — is what I mean by paying attention to content. It’s a lot more than just noticing the consensus of what’s acceptable or what’s fashionable and making sure people implement it. As I noted earlier, people are now being fired on ethical grounds for business practices that were once required, yet it’s hard to see how the inherent morality of these practices has changed in the intervening years.

One thing this rigorous content analysis will train us to do is to recognize when a seemingly straightforward business decision might actually involve a larger moral principle. This is important, and I’ll spend the rest of our time discussing this idea and its implications.

But let me also digress for a moment and point out that rigorous ethical analysis will also help us in the reverse situation. That is, it will help us detect false moral claims that are really just cultural preferences. For instance, I can recall an East Coast classmate in my graduate school being completely impressed by a case study of Mary Kay cosmetics, but then deciding the next day that the company was engaging in "inappropriate" business practices after seeing a 10‑minute film. The film showed stunningly dressed Mary Kay women from Texas at a sales convention being awarded Pink Cadillacs and belting out songs like, "We’ve Got That Mary Kay Enthusiasm Down in Our Soul." In America’s evenly divided, red-blue body politic, cultural issues will be increasingly divisive, and they will challenge the strategies of corporations that want to appeal to a broad range of customers just as they challenge politicians who want to appeal to a broad range of voters.

But more important, as I mentioned a minute ago, is the other side of the coin: developing ethical guidelines that identify cases where business decisions appear to be tactical, but actually involve a transcendent moral principle. Let me mention a couple of examples that should make the importance of ethical content clear, while fully recognizing that you may not agree with me about the actual principles — and that we don’t always need to agree in order to live in a viable social marketplace.

Back around 1980, Bill Niskanen was chief economist of the Ford Motor Company. The late 1970s had seen a dramatic increase in gas prices, and domestic automakers were being pressured by the more fuel-efficient cars of their foreign competitors. The Big Three went to Washington, D.C., looking for import quotas.

As a business decision, this involved trade-offs. Asking for import protection risked retaliation by other countries, further closing foreign markets to U.S. cars. Still, a cost-benefit analysis might have suggested that Ford’s shareholders could expect better returns through a strategy of protecting Ford’s domestic market than through a strategy of trying to extend its foreign market.

Niskanen refused to go along with this analysis. Instead, he stated in the newspaper, "A common agreement not to seek special favors from the government serves the same economic function as a common agreement not to steal." In other words, he elevated this cost-benefit question to a moral level.

Not surprisingly, Niskanen lost his job. There’s something about publicly comparing your employer to a criminal that can do that.

But while reasonable people can disagree over his viewpoint, I’d nonetheless argue that Niskanen’s stand represented a truly well-considered and courageous example of business ethics in action.

In a more recent example, a few weeks ago state Senator Ken Sikkema reportedly got into a shouting match with a group of industrial lobbyists over their taxes. After the meeting, Sikkema was quoted as saying, "They basically came in and before anything else was said, …. demanded a tax increase on other job providers to give them a tax cut." Now, I don’t know if he characterized their position accurately, and I can certainly understand why manufacturers would want to pay less in taxes. Michigan is a high-tax state, and it refuses to cut spending in ways that would let the state’s tax burden decline to sustainable levels.

Still, Sikkema was in essence suggesting that not every means of getting a justifiable and beneficial outcome is itself justified. He was saying that business leaders should not seek from government special treatment that will have to be paid for by others.

This is essentially similar to what we at the Mackinac Center articulate as the "sixth principle" of sound public policy — namely, "Government has nothing to give anybody except what it first takes from somebody." We’ve given each of you a bookmark that lists these seven principles, and when you read them, you’ll probably see others that have implications for business ethics. Usually, what is ethical in one domain, such as public policy, has ethical implications in another, such as business.

Now I recognize that, as I mentioned earlier, many of you won’t agree with my ethical conclusions or with the seven principles on that bookmark and my interpretation of them. Some of you will be so convinced that I am wrong that you could argue with me for days or even years. Where does that leave us?

Well, I don’t believe it leaves us deadlocked. If we can agree, for instance, that not all of our ethical discourse should be settled in the courtroom or in the Senate, we can help avoid the kind of charged and punitive legal confrontations that can obscure the underlying ethical issues, rather than clarifying them. Sadly, most people probably feel they have less understanding of what constitutes sexual harassment under the law than they did before Clinton’s impeachment, and they almost certainly have less understanding of that law than they do of what kind of behavior, in general, is acceptable between two people in the workplace.

Developing private-sector cultural norms doesn’t have to condemn us to pointless bickering. We should remain optimistic. We may have some nasty disagreements, but we’ve got a few hundred years of precedent and experience to look at. When I hear one of the talking heads on TV say, "This country has never been more divided," I wonder if they’ve ever heard of the American Civil War. Even during peacetime, 18th and 19th century economic and religious divisions in America were much greater than those we face today. Many of these were mitigated by a First Amendment that called for sectarian differences to be settled outside the courts and the halls of Congress.

That amendment also engendered a number of shared values — such as pluralism and tolerance — that allow us to peacefully coexist today. The same can happen in the marketplace, with many practices of business ethics, such as "full disclosure," ultimately emerging because they are found by the citizens of a democratic republic to be fundamentally fair. Such debates, together with market competition, however heated, will also be enlightening.

At least in my view, this is what enlightened self-interest is about — and it sounds ethical to me.

Christopher F. Bachelder is director of communications for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.