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Honesty can maximize value over long term
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If you used the term 鈥渂usiness ethics鈥 in the 1970s, when the field was just starting to develop, a common response was: 鈥淚sn鈥檛 that an oxymoron?鈥 That quip would often be followed by a recitation of Milton Friedman鈥檚 famous dictum that corporate executives鈥 only social responsibility is to make as much money for shareholders as is legally possible.
Over the next 40 years, however, businesspeople stopped quoting Friedman and began to talk of their responsibilities to their companies鈥 stakeholders, a group that includes not only shareholders, but also customers, employees, and members of the communities in which they operate.
In 2009, an oath circulated among the first class of Harvard Business School to graduate after the global financial crisis. Those who took it 鈥 admittedly, a minority 鈥 swore to pursue their work 鈥渋n an ethical manner鈥 and to run their enterprises 鈥渋n good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.鈥
Since then, the idea has spread, with students from 250 business schools taking a similar oath.
This year, all Dutch bankers, 90,000 of them, are swearing that they will act with integrity, put the interests of customers ahead of others (including shareholders), and behave openly, transparently, and in accordance with their responsibilities to society.
Australia has a voluntary Banking and Finance Oath, which obliges those taking it (more than 300 people have so far) to, among other things, speak out against wrongdoing and encourage others to do the same.
No eggs from caged hens
In September, McDonald鈥檚, the largest purchaser of eggs in the United States, showed that it can contribute to ethical progress, by announcing that its US and Canadian operations would phase out the use of eggs from caged hens.
According to Paul Shapiro, the US Humane Society鈥檚 vice president for farm animal protection, the move signals the beginning of the end for the cruel battery cages that have, until now, dominated America鈥檚 egg industry.
Then came the revelations that Volkswagen installed software on 11 million diesel cars that reduced emissions of nitrogen oxides only when the cars were undergoing emissions tests, enabling them to pass, even though in normal use their emissions levels greatly exceeded permitted levels. In the wake of the ensuing scandal, the New York Times published their responses under the heading: 鈥淚s Honesty for Suckers?鈥
Cynics would say that nothing has changed in the last 40 years, and nothing will change, because in business, all talk of ethics is intended only to camouflage the ultimate aim: profit maximization.
Yet Volkswagen鈥檚 cheating is odd, because, even 鈥 or especially 鈥 by the standard of profit maximization, it was an extraordinarily reckless gamble. Anyone at Volkswagen who knew what the software was doing should have been able to predict the company was likely to lose.
Indeed, all that was required to lose the bet was an attempt to confirm that the emissions results obtained when the vehicles were undergoing federal emissions tests were similar to those resulting from normal driving.
In 2014, the International Council on Clean Transportation commissioned West Virginia University鈥檚 Center for Alternative Fuels, Engines, and Emissions to do just that. The software ruse quickly unraveled.
Reputation damaged
Volkswagen鈥檚 stock has lost more than one-third of its value since the scandal broke. The company will have to recall 11 million cars, and the fines it will have to pay in the US alone could go as high as US$18 billion. Most costly of all, perhaps, will be the damage to the company鈥檚 reputation.
The market is giving its own answer to the question 鈥渋s honesty for suckers?鈥 Its response is: 鈥淣o, honesty is for those who want to maximize value over the long term.鈥 Of course, some corporations will get away with cheating. But the risk is always there that they will be caught. Honesty maximizes value over the long term, even if by 鈥渧alue鈥 we mean only the monetary return to shareholders. It is even more obviously true if value includes the sense of satisfaction that all those involved take from their work.
Several studies have shown that members of the generation that has come of age in the new millennium are more interested in having an impact on the world than in earning money for its own sake. This is the generation that has spawned 鈥渆ffective altruism,鈥 which encourages giving money away, as long as it is done efficiently.
Peter Singer is Professor of Bioethics at Princeton University and Laureate Professor at the University of Melbourne. His books include 鈥淎nimal Liberation,鈥 鈥淧ractical Ethics,鈥 鈥淥ne World,鈥 鈥淭he Life You Can Save鈥 and, most recently, 鈥淭he Most Good You Can Do.鈥
Copyright: Project Syndicate, 2015. www.project-syndicate.org. Shanghai Daily condensed the article.
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