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5 business ethics must-reads

Here is some essential reading for your ethical summer vacation.

Business ethics is a number of things—an academic discipline, a field of practical expertise and, increasingly, a central business function.

But in order to say anything useful about ethical issues in the marketplace, you first need to understand something about how markets work, how they fail, and what the ethical argument for their existence is. And simply being in business doesn’t guarantee that you understand markets, any more than being an athlete guarantees that you understand physiology. You need to go to someone who has a deep understanding not just of one particular market—the market for mobile phones, say, or for cars—but of markets in general.

So here are five of what I regard as essential reading in business ethics, along with an explanation of their significance.

The List

No. 1 Adam Smith’s The Wealth of Nations. (It’s freely available online, and I recommend reading at least the first three chapters of Book 1, Volume 1.) Smith, one of the great philosophers of the Scottish Enlightenment, wasn’t the first to speculate about how economies work, but he’s generally thought of as the guy who more or less got it right. Smith is to economics what Darwin is to biology. In The Wealth of Nations, Smith outlines the basic way in which trade produces mutual advantages, the way those advantages encourage specialization, and—importantly—the way self-interest is sufficient to get the whole process started. (But a word of caution: Smith is often wrongly thought to have encouraged greed. Nothing could be further from the truth. For useful correctives, read Nobel-prize-winning economists Ronald Coase and Amartya Sen.)

No. 2 My next suggestion is to read something by Edward Freeman on what’s known in academic circles as “Stakeholder Theory.” His co-authored piece called “Stakeholder Capitalism” would do, as would any of a number of papers he’s authored or co-authored over the last three decades. The basic idea that Freeman defends is that corporate managers shouldn’t see themselves as beholden primarily to shareholders, but rather as ethically obligated to balance the interests of a wide range of stakeholders. The idea is attractive, but also deeply flawed, for reasons that the next two readings explain. One way or the other, the stakeholder idea forms an important part of the debate over how we should think about the central obligations of managers. (For my review of one of Freeman’s recent books on the notion, see here: Review of Managing for Stakeholders.)

No. 3 The best antidote to Stakeholder Theory is Joseph Heath’sBusiness Ethics Without Stakeholders.” Heath argues that the stakeholder idea, however evocative, only muddies the water without providing managers with any useful direction. Heath’s paper basically outlines the fundamental debate over shareholders-vs-stakeholders in business ethics. In that regard, it’s a useful summary of the field. Heath argues that while shareholder- and stakeholder-driven theories of business ethics have virtues, both are also subject to fatal flaws. He argues for an alternative, which he calls the Market Failures theory. According to this theory, the guiding ethical notions for businesses ought to be to honour the preconditions for market efficiency. In other words, they shouldn’t engage in the kinds of behaviours that make markets fail: they shouldn’t seek to profit from information asymmetries, or from externalities, or from exercising monopoly power.

No. 4 A bit of middle ground can be found in the work of John Boatright, particularly his article “What’s Wrong—and What’s Right—with Stakeholder Management.” In previous writings, Boatright has generally not been a fan of stakeholder theory. But in this paper, he says the stakeholder idea can play a legitimate role in the corporation, if used properly. In particular, Boatright says the stakeholder idea should only be held up as an ideal, a source of a sense of mission, a motivator reminding corporate insiders that all participants need to find long-term benefit. He argues that the stakeholder idea is much less likely to serve the role that Freeman and his fans think it ought to play, namely that of a principle for corporate governance.

No. 5 All of the above is aimed at helping frame the question of how businesses (or people in business) ought to behave. But sometimes the problem isn’t with knowing the answer, but with putting it into action. And that seems to be a problem. After all, there’s a good deal of wrongdoing in the world of business. And yet look around you: most of the people you know (starting with yourself!) are pretty decent, honest folks. How do so many good people end up doing bad things?

In this regard, I recommend another paper by Joseph Heath, namely his “Business Ethics and Moral Motivation.” Heath points out that, when asked about what motivates wrongdoing, most people say it has a lot to do with greed, or with other deep character flaws. The trouble with this, he says, is that the scholars who study wrongdoing in the most depth—namely, criminologists—long ago considered and rejected those as key factors in wrongdoing. The real source of trouble, says Heath, lies in the ability people have to offer themselves excuses, and in particular to redescribe their behaviour in ways that let them rationalize it. “Sure, I took the money. But I wasn’t stealing—I was just taking what I was owed.” To get people to behave better, you need to help them see that such rationalizations are unsupportable, and we need to work to avoid institutional cultures that actually encourage thinking in those ways.

So that’s my list. It’s admittedly a particular take on the field—all of the authors cited above are philosophers. But hey, I’m a philosopher by training, and so I’m committed to the idea that an understanding of fundamental principles always helps. As someone once said, there’s nothing so practical as a good theory. Reading these won’t guarantee excellence in ethical decision-making, but they will help you understand what is fundamentally at stake in our ongoing exploration of what behaviour is right, and what behaviour is wrong, in the world of business.