The Implications of Ethics on Business

When Margaret Thatcher stated there was no such thing as society, it seemed to mark the commencement of 20 years of economic growth fuelled by the concept of high personal reward for success, and the drive for greater and greater returns for shareholders. As Atrill & McLaney (2009, p12) point out, businesses are created by their owners (Shareholders) with the intention of enhancing those owners wealth.

During this time of relative economic prosperity, we witnessed several “ethical” scandals where business leaders appeared to put personal gain above the security of the shareholder investment, leading to false accounting and company collapses, typified by WorldCom, Enron, and Parlamat. However these fraudulent business activities did not seem to deter the dash for growth and commercial prosperity, and it was until the global banking crisis and the collapse of banks such as Lehman Brothers, that the question of the ethical approach of business leadership seemed to return to the agenda, particularly for politicians.

But do ethical CEO’s really have a social responsibility outside their consumer base, and should they actively support a decision that reduces shareholder wealth in the name of Ethics?

Leadership Ethics – The Theory

It would seem to me that a theory that is based on the work of Aristotle or Plato may just be a little confused! What seems clear is that there is this thing called ethical leadership, the concept of which most of us would support, but there is no theory of ethical leadership that appears to be a “comfortable fit” in articulating a best practice model.

Indeed, Knights & O’Leary (2006) point out the failings of various ethical leadership theories yet perhaps fail themselves to bring anything substantially new to the table.

Northouse (2010, pp 386-393) proposes 5 principles of ethical leadership:

• Ethical leaders respect others
• Ethical leaders serve others
• Ethical leaders are just
• Ethical leaders are honest
• Ethical leaders build community

Within this definition I can think of some very ethical leaders I have worked for. The overriding feeling I had with each of them was that they would always do the right thing, even if it financially disadvantaged them or the company. The most common examples I can remember are simple decisions where the company could have “got away with” accounting for some operational expenditure as capital expenditure, thus artificially enhancing the profits. Whilst there were perfectly legal ways of doing this, the ethical leaders somehow new where the line they must not cross was. They knew the difference between legally right and morally right!

Ethics – Beyond the P & L

Business ethics is not just about the legalities or moral responsibilities of business accounting. More companies are recognising the need to represent their shareholders in an ethical way in the way they trade with communities, countries, and the environment.

I was reminded this week of the dreadful events of a gas leak in a chemical factory in Bhopal, India, 25 years ago. (BBC Online News, 2010). No longer is it acceptable for western companies to run substandard divisions in developing countries, neglecting the welfare of their employees or contractors. But then again, even if Nike claims to have stopped kids sewing footballs together in “sweat shops”, they will be doing it for someone else.

At Banco Santander they invest heavily in University sponsorship and grants as a way of giving something back to the community. So is this the cleansing of the corporate sole or good PR!

Can there be such a thing as an ethical tobacco company, whose products are smoked by millions of children, throughout the world, causing addiction and ill health, as well as exacerbating poverty, or is this simply about supporting the ethics of freedom of choice?
Was the deep water drilling in the Gulf of Mexico, about the ethical exploitation of natural resources to free the American people from external energy supply dependency, or the unethical exploitation of natural resources without consideration for the environmental risks? If you subcontract the drilling have you subcontracted the ethical responsibility?

Can an Arms manufacturing business produce and sell weapons systems that will knowingly be used to wage war between nations, ethically?

Can the pursuit of profit by an investment bank, betting on, and often causing the failure of others to makes its money be ethical?

The CEO’s of BP, BAE and BAT could fit Hothouse’s 5 principles of ethical leadership yet still, perhaps unfairly, be seen as unethical in their approaches to business.
The behaviour of an organisation and its leaders can have a significant impact on all those stakeholders involved. In BP, a failure to use caution in the assessment of the risk of equipment failure in deep water drilling, meant a failure to respond appropriately when disaster struck.

The consequence to shareholders has been enormous, both in terms of share value, and future business potential, franchisees who merely use BP as a supplier of fuel have had their gas stations vandalised across America, and as for the employees, when the ethics of an organisation are questioned, so are those of every employee.

After all, if you work for a tobacco company, you are supporting the consumption of cigarettes by everyone who smokes them, no matter what their age and background!

Conclusion

There is no doubt that the ethics of leadership are key for an organisations future growth, and whilst Knights & O’Leary (2006) dismiss the impact of the trait approach to leadership, I would argue that a common feature of the leaders of those business involved in huge financial frauds, is the presence of narcissism and psychopathy. Whilst there is an argument for traits not predicting leadership capability, identifying traits, or even personality disorders that would make someone unsuitable for leadership, may be a more effective deployment of personality measurement tools that measure the “big five” personality factors. (Myers 2007, pp 618-619)

The need for further research on ethical leadership is clear but this aspect of the leadership debate surely demands more empirical evidence and measurement of ethical leadership and its effect on performance. For whilst many companies portray themselves as ethical businesses with an eye on the social needs of those around them, I do not see too much evidence of mainstream businesses sacrificing today’s profits for tomorrows social and environmental needs.

References

Atrill, P. & McLaney, E (2009) Management Accounting for Decision Makers. 6th Edition. Harlow, England: Financial Times prentice Hall.
BBC News (2010) ‘Bhopal recalls gas leak disaster’. BBC News [online] available at http://news.bbc.co.uk/1/hi/in_depth/business/2009/bhopal/default.stm Accessed 12th June 2010.
Knights, D., & O’Leary, M. (2006) ‘Leadership, ethics and responsibility to the other’, Journal of Business Ethics, 67 (2), pp. 125–137, SpringerLink [Online]. DOI: 10.1007/s10551-006-9008-6 (Accessed: 11th June 2010).
Myers, D (2007) Psychology, Eighth Edition. New York, NY. Worth Publishing.
Northouse, P.G. (2010) Leadership: Theory and practice 4th ed. London: Sage.