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November-December 2009

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Teaching Business Ethics in the Age of Madoff

Tell someone that you teach “business ethics,” and you know what they say: “Isn't that an oxymoron—you know, like jumbo shrimp?” Or, “I didn't know business had any ethics.” Or, “Must be a short course.” Recently, we even got, “That's a pretty theoretical course, isn't it?” And this is a joke that travels: we've heard these kinds of responses in many countries and cultures. So what does it mean to teach “business ethics”? And has it changed in the age of financial crisis, burst bubbles, and Bernie Madoff?

Business Ethics: A Brief History

Business and commerce, and their connections to ethical thinking, are as old as civilization. However, according to Richard De George, business ethics as an academic discipline is a relatively recent phenomenon. In the mid-1970s, a group of scholars, primarily in U.S Catholic universities, began to study business from the standpoint of ethical theory. In 1974 the discipline's first academic conference in this country was held at the University of Kansas. In 1980 these scholars formed the Society for Business Ethics, after which two academic journals emerged: The Journal of Business Ethics in 1982 and Business Ethics Quarterly in 1991. By the mid-1980s, courses, textbooks, casebooks, and organizations had all proliferated.


The anti-war, anti-establishment protests of the 1960s and 1970s, together with an increase in environmental awareness, had led to many questions about the role of business in society. So as the discipline was developing, another group of scholars started to think about corporate social responsibility. They formed a division of the Academy of Management (the main professional organization for management professors) called “Social Issues in Management” and began to do research in a broad area called “business and society.”


William Frederick, professor emeritus at the University of Pittsburgh and a leader in this movement, identifies the 1961 publication of Richard Eels and Clarence Walton's Conceptual Foundations of Business as one of the academic starting points for this approach. Even as research in most business disciplines got narrower and more “scientific,” these scholars continued in the role of critic. Key concepts and terms for the field—such as “corporate social responsibility,” “social reporting and auditing,” and “stakeholders”—came out of this line of attack.


Those scholars who promulgated “business ethics” generally took a humanist approach, while “business and society” scholars saw themselves as social scientists. Happily, while these debates still occasionally break out at professional meetings, the past 10 years have seen a merging of the two and more conversation across academic lines. Indeed, many of the humanities-trained business ethicists now have appointments, including endowed chairs, at leading business schools. In this article we are going to use the phrase “business ethics” to refer to the merger of these two groups of scholars, since the search for a more inclusive term continues.


The Role of Scandal

The business-ethics discipline has been periodically stoked by scandal, which has led to a long tradition in its courses of analyzing scandals, cast in the form of case studies. First there was the Lockheed Brake Scandal, which led to the Foreign Corrupt Practices Act in 1976. Then we had the first Firestone tire scandal and the infamous Ford Pinto debacle. The 1980s saw the Wall Street scandals regarding insider trading, which produced “villains” such as Dennis Levine, Ivan Boesky, Michael Millken, and others. These scandals were imprinted on the culture via the movie Wall Street and the infamous Gordon Gecko's pronouncement that “greed is good.” The 1990s saw the internet bubble boom and bust, ultimately resulting in the wave of corporate scandals on a grand scale such as Enron, WorldCom, Tyco, and Adelphia Cable. Finally, scandal became globalized with, for example, the UN “Food for Oil” program and the Italian company Parmalat.


Mary Gentile, head of the Giving Voice to Values curriculum project at the Aspen Institute (http://www.givingvoicetovalues.org), describes “the routine that developed over time” in business schools as each “window of urgency” opened up: “Business educators would try to accomplish some curricular reform, and then we'd work as quickly as possible to get changes made before the window would shut again.” Sometimes these efforts backfired. Michael Lewis, who chronicled the culture of Wall Street in Liar's Poker, reveals that some business students who read his book, rather than being appalled by Wall Street's fraud and greed, wrote to him for more “tips” on how to make it there. To them, the book was not a cautionary tale but an instruction manual.

But while the sinners were painted in lurid colors as rapacious and greedy, there were also saints in this morality play. These were the “good” companies—Johnson & Johnson with its response to the Tylenol poisonings, for instance, or Merck, which gave away a cure for river blindness. And there were companies that took social responsibility seriously: In Minnesota, members of the 5% Club donated five percent of their pretax profits to charity.


The myth of “saints” versus “sinners” developed as a result of focusing on scandals. But it has been challenged, and with good reason. Thomas Donaldson, for instance, thinks that “the ‘greed’ explanation for Wall Street excesses” is “unhelpful.” He says, “I want to believe it too, but no serious study has shown that greed is higher on Wall Street than in other industries, or for that matter higher in any one industry than in another, or in any time period than in another. Greed no doubt varies by time and place, but it is notoriously hard to measure and is a persistent feature of the human condition.”


Most business professors would acknowledge that in order to address ethical considerations, they need to go beyond the study of saints and sinners and incorporate ethical considerations more broadly into the curriculum. So today, most major business schools include ethics courses. But increasingly, business ethicists believe that the problem lies in the very conception of business that business schools hold and teach. Unless we think about scandals in these more fundamental terms, we are doomed to repeat the cycle of scandal begetting public outrage, which begets regulation, which begets scandal, and so forth.


The Role of Business Schools

The financial crisis has amplified recent critiques of business schools that began in earnest after the bursting of internet bubble, for which they were seen as partly to blame. Management theorist Henry Mintzberg, for instance, argues that business-school graduates are responsible for much of the economic misery in the world and places the blame squarely on the shoulders of the schools that shaped them.


Perhaps the most powerful critique comes from the late Sumantra Ghoshal. Teach business students that ethics doesn't matter in business decisions, he said, and they will go out into the world and enact that theory. Teach them that managers need incentives to act in the interests of shareholders, and your graduates will focus on executive compensation. Teach business students that only shareholders matter—taking precedence over employees, communities, and suppliers—and they will go forth to give us the current financial crisis.

Ethics is often simply bolted onto a curriculum that does not encourage students to engage in moral reflection and that belies what they learn in their ethics courses. The standard business school curriculum is full of analytic techniques, methods of financial engineering, and an ideology that is deeply hostile to business ethics. The very roots of business education are entangled with unacknowledged—and therefore largely unquestioned—assumptions about both human nature and the fundamental nature and purpose of business.


Business schools typically perpetuate the following four misconceptions:


1. Markets are perfect, or at least efficient.


The inflating and bursting of bubble economies that led to the global economic downturn offers some empirical evidence that markets are not always efficient, never mind perfect. This should surprise no one, since markets are a human construct. It is easy to lose sight of this fact—markets are enormously complex, and sifting out the dynamics of individual agency is like trying to trace the movements of a grain of sand in the belly of a rotating cement mixer.


2. Human beings are always self-interested.


One of the key reasons the case method of teaching is so powerful is that individual cases help reveal the sizable gap between the narrative of business that emerges from an overemphasis on economic trends and the narratives that are shaped by the stories of real entrepreneurs and executives.


Even if one accepts the proposition that human beings are always self-interested, there are clearly forms of expressing self-interest that arise from non-economic values, even if decisions made on this basis have economic repercussions. The mother who turns down a higher-paying job out-of-state so that her school-age children can continue going to school with current friends and the farmer who tills the soil because of the deep happiness he experiences from seeing the fruits of his labor are two examples.


3. Economic models and reasoning can explain most of what is interesting about business.


The global economic downturn has helped to put a crack in the edifice of rational self-interest as an all-encompassing explanation of business activity. The idea that financial institutions could, in the name of profitability, lend huge amounts of capital to more and more people at high risk to default on those loans—coupled with a belief that organizational and systemic risks would actually be lowered by credit default swaps and similar financial instruments—no longer seems all that rational.


As the philosopher Charles Peirce and others have argued, there is a plethora of evidence to suggest that we ought to distinguish between the logic and the rationality of our decisions, because not all of our decisions are rational, even if they follow a certain logic.


4. Ethics is about altruism.


The proposition that business is all about economic self-interest while ethics is about altruism is also clearly flawed. The electric light bulb is as much the result of Thomas Edison's aspiration to change the world—and his contemporaries' desire for illumination without threat of fire—as it was of a desire for profit. Every day participants in thousands of online communities offer one another technical assistance or give companies free feedback on new products. Every day researchers working for pharmaceutical firms and universities search for treatments to alleviate human suffering. For many, the profit motive and transfer of capital is not the primary driver—it is, rather, the primary enabler of their sustained activity.


An ethics course grafted into a curriculum based on these faulty ideas can, at best, merely sensitize students to the possibility of thinking differently about business. Real change will only happen when we stop appending ethics to business education and move forward with long-term efforts to build ethical considerations into the DNA of business education.


More broadly, this means we need to tell and enact a revised story about business that shifts the center of gravity from profits to value creation, where accomplishments such as creating meaningful work for employees, helping to meet social needs, and improving the environment for the next generation are recognized as distinguishing marks of the business hero—a model to compete with the currently predominant one of the person who delivers shareholder returns. The old narrative of business as anything-goes capitalism, whose central metaphors are greed, money, and profit and whose sole value is the short-term interest of investors, is no longer useful in today's world. Profit, markets, and the like are there not as ends in themselves but to assist the hero in reaching his or her goal.


The new story goes something like this.


1. Business is primarily about purpose. Money and profits follow.


Business is primarily a form of social cooperation—it is about people working together to create value that no one of us could create on our own. It is about creating chairs that allow the body to rest, vehicles and networks that enable us to travel and communicate over great distances, a range of products and services as broad as the human imagination.


Of course profits are important, but as Jack Welch, former CEO of GE, argues, profits are not what you do—they are a result of what you do.


2. Any business creates (or sometimes destroys) value for shareholders, as well as for customers, employees, suppliers, and communities.


Building and leading a business involves getting these interests going in the same direction.


3. Capitalism works because we are complex creatures with many needs and desires, and we can cooperate to create value for each other.


Sometimes we act for selfish reasons and sometimes for “other-regarding” ones. Incentives are important, but so are values.


4. Most people tell the truth and keep their promises, and act responsibly most of the time


… and we need to expect that behavior. Business and capitalism are the greatest system of social cooperation and value creation ever invented. Competition is important in a free society, since it ensures that people have options. But the engine of capitalism is value creation.


It is not only academics who are hungry for a new story about business. Dean Krehmeyer, executive director of the Business Roundtable Institute for Corporate Ethics, says that many of the CEOs and other executives with whom he speaks are tired of being tarred by the latest scandals, which are not reflective of how the vast majority of companies operate. “There aren't many Enrons and Bernie Madoffs, when you think about the scope of business activity around the world,” says Krehmeyer. “Many of these companies are raising the bar for how businesses create lasting value to customers, employees, suppliers, and investors.”


The new story of business will not ignore scandals, but it will cease being defined by them. Redefining business in terms of value creation is critical for enabling the next generation of leaders who aspire to change the world to view it as a viable—and perhaps even preferable—way to achieve their goals.

Deep-rooted cultural change such as this demands the sustained efforts of many people. But business schools, which have a unique responsibility for educating current and future executives, should be leading the charge.


Teaching in the Age of Madoff

Business schools and business-ethics educators can play a role in effecting change. On the school-wide level, there are two key opportunities for telling the new story about business. First, business schools need to engage the broader university community. The new narrative needs to involve the humanities in particular, which has created (and continues to create) a wealth of knowledge about human needs, behaviors, values, and cultures. As Timothy Fort notes, “most business analysis neglects the human side, the long-term side that is the currency of trust” because this critical area is “notoriously difficult to quantify.”


Second, business schools need to increase their engagement with businesses. Over the last two decades, these schools have become increasingly professionalized. At well-established institutions, nearly all of the faculty are academics with doctorates; in an earlier era, a much larger percentage were former business executives. While this trend has had many benefits, it also raises a challenge: business schools must now actively cut paths to the business community to replace the ones that were previously beaten by the to-and-fro passage of many feet.


Of course there are many forms of engagement that are still organic to the enterprise, such as writing case studies or conducting research on an industry. But these are insufficient for the purpose we are advocating, because they tend to put academics in the active position of observers, while executives and companies become passive objects of study. What is needed is a more equal dialogue where both parties listen to each other and collaborate on identifying the current challenges facing business, developing hypotheses about current trends and their drivers, conducting research that tests proposed solutions, and communicating the best thinking that results in a broad range of stakeholders.


This can happen across a range of specialties. There are many opportunities for faculty in accounting and finance, for instance, to work with business in analyzing what went wrong in this global financial crisis. What changes should we make both in business schools and businesses to avoid future Madoff scandals?


At the same time, business-ethics educators can help to transform business schools in the Age of Madoff. As Joshua Margolis of the Harvard Business School contends, “Business ethics can serve as a beacon of purpose, articulating and defending higher aspirations—the purposes business can serve and the roles managers can play.”


To fulfill their responsibilities, business ethicists need to broaden their role by undertaking four key actions.


1. Emphasize competence as much as character.


Ethics all too often is treated as being purely a matter of “character” (which leads to the saints and sinners mentality mentioned earlier), whereas other fields in business schools are about “competence.” This shortchanges ethics, which involves conceptual and behavioral competence as much as character.


One such competence is the capacity to anticipate the effects the various choices one make as a manager or employee can have on a company's stakeholders and the potential moral hazards involved. Before students are given the keys to large financial vehicles, it is now clear that they need to learn the basic rules of the road, recognize the hazards they will face while driving, and identify for themselves the destination they feel is worth driving toward.

An effort that emphasizes competency is Giving Voice to Values (GVV)—a research, dialogue, and curriculum development program created by the Aspen Institute for Business in Society in partnership with the Yale School of Management. The purpose of GVV is to identify and analyze ways that business practitioners can voice and implement their values in the face of countervailing pressures and to share this capacity through a skill-building curriculum and publications.


The program assumes that speaking up is as much about competence as it is about character. Many people have asked, “Why didn't someone at Enron speak up sooner?” The GVV program, which is informed by research, says that part of the explanation is that Enron employees lacked the competence to speak up—many executives simply do not get enough coaching and practice in this area. Distinctive features of the program—according to Mary Gentile, the GVV director—include “a focus on positive examples; an emphasis upon the importance of finding alignment between the individual's and the organization's sense of purpose; and opportunities to practice responses and to provide and receive peer feedback.”


2. Engage contemporary issues.


Anne Mulcahy, chairman of Xerox, recently said, “In the midst of this turmoil, the global economic crisis presents a unique opportunity for leaders to step forward and make business better. This is an opportunity we must seize.” The global economic crisis has also opened up new opportunities to teach ethics, since students are more likely to recognize the topic's saliency. Laura Hartman of DePaul University for instance, told us that in her classes, “students pay attention these days because they know it's important.”


In light of this change, business ethicists need to stop fighting for legitimacy within the social sciences and move their focus to external states of affairs. To be an important voice—whether as a critic or as a problem-solver—demands that business- ethics educators remain engaged with real-time issues, reflecting constantly on the cogency of their body of knowledge to current events in order to shorten the “time-to-market” for their ideas.


3. Incorporate systems thinking.


Many of the past scandals involved business people who were engaged in illegal and unethical activities, and prosecutions and prison sentences were thought to be the remedy. During the present crisis, much of what caused the harm may be legal; however, it was overly risky and, in many cases, not conducive to creating long-term value. In that sense, it was unethical. This emphasizes the need for a more systemic understanding of how businesses do or do not function ethically.


And that systematic understanding is increasingly needed worldwide. As Dean Krehmeyer, executive director of the Business Roundtable Institute for Corporate Ethics, says, “This crisis shows that globally, businesses and industries are more interconnected than ever—and, that risk management, particularly with respect to systemic risk, is not ahead of the curve like we thought just a short time ago.”


Business ethics educators are well positioned to lead a discussion with students about how to identify and minimize systemic risks. To do so effectively, however, will demand deeper engagement with other disciplines within and outside of business schools (e.g., law, psychology, and politics).


4. Champion an enterprise approach to ethics.


This deeper engagement with other disciplines is also critical for leading an enterprise approach to ethics at business schools and for integrating ethics throughout a curriculum. An enterprise approach takes a broad view of how courses, the curriculum, and the culture of the school contribute to ethics. It identifies leverage points in the culture of the school so that business ethics can become engrained at the deep level of core values.


Some of the larger business schools have made substantial progress in this area. For example, at the University of Virginia's Darden School of Business, ethics is seen as one of the foundational disciplines of business, on a par with marketing, finance, entrepreneurship, operations, and the like. Not only does Darden require an interdisciplinary course taught by faculty trained in ethics and functionally trained faculty, but it offers a set of electives—from seminars in ethical theory to courses using literature and the fine arts, such as drama—that address ethical issues. Affiliated faculty in the business disciplines also routinely include business ethics in their courses.


The situation is similar at Harvard Business School. According to professor Thomas Piper, one of the architects of the business ethics program there, “Our emphasis is on a three-lens model: an economic imperative; a legal/regulatory imperative that connects to public policy concerns; and an ethical imperative. We believe that each lens is very important; no one lens is sufficient.” This approach depends upon close collaboration among faculty trained in a variety of disciplines: law, ethics, marketing, organizational behavior, economics, strategy, and general management.


A similar strategy is employed at the Stern School at New York University. According to Professor Edwin Hartman, NYU has created a faculty symposium to “build and sustain a vibrant community of faculty across disciplines who conduct research in business ethics and related fields.” Meanwhile, NYU faculty across disciplines—including economics, philosophy, psychology, neural science, sociology, and law—have been charged with incorporating business ethics into their teaching with both undergraduate and business school students.


Something like this new story of business that we have described is beginning to be told in these and other major business schools, and the current financial crisis makes the telling much easier. Of course, this new story is not without controversy. Lively debates continue about the relative importance of stockholders versus stakeholders, the role of financial markets, the importance of the business disciplines compared to getting students to think across disciplines, the relevance of standard accounts of ethical theory, the role of government in the marketplace, the effects of globalization, and countless other topics. And, it is important to note, this type of change is far more difficult for schools with fewer resources.


Despite these caveats, the financial crisis has created a window of opportunity for both businesses and business schools to re-imagine how they might engrain ethics into the DNA of their activities so as to make business, and the world that business affects, better. Bolting ethics onto business and business education has been an extremely attractive route, because it is a much easier one to follow than the kinds of changes we have suggested. But, like many other short-cuts, this path moves us further from our destination by creating an illusion of progress.


The real journey begins when we actively engage, as live issues, the presuppositions about markets, economic models, and human nature that are foundational to prevailing beliefs about business. And for those who teach business ethics, it begins when we stop fighting for legitimacy and start affecting business in the positive ways that our knowledge empowers us to do.


Are we making progress? While it is extremely difficult to document, we do notice some encouraging signs. There is more interest by business schools and their leadership in talking about ethics as a fundamental part of business. And there is a definite uptick in the interest of students in looking at “social entrepreneurship ventures,” sustainability, and corporate responsibility.


Change is difficult and often slow. The best way to measure progress will be an increasing number of students who choose to enroll in business school because they aspire to change the world. And those students, in demanding that we help them develop the competencies to make those changes, will in turn help us improve how we teach the next generation of business leaders.


Resources

All quotations are from these sources or from personal interviews and emails done exclusively for this article.


1. Shaping Tomorrow's Business Leaders: Principles and Practices for a Model Business Ethics Program, Business Roundtable Institute for Corporate Ethics, Retrieved July 7, 2009 from http://www.corporate-ethics.org/pdf/mbep.pdf

2. The Dynamics of Public Trust in Business'Emerging Opportunities for Leaders, Business Roundtable Institute for Corporate Ethics, Retrieved July 7, 2009 from http://www.corporate-ethics.org/pdf/public_trust_in_business.pdf

3. Bruner, Robert (August 20 2009) “Professor Says Business Schools and Students Can Take Away Lessons From Financial Crisis,”. Wall Street Journal

4. De George, Richard T. (1987) “The Status of Business Ethics: Past and Future,”. Journal of Business Ethics 6, pp. 201-211.

5. De George, Richard T. A History of Business Ethics, Retrieved July 7, 2009 from http://www.scu.edu/ethics/practicing/focusareas/business/conference/presentations/business-ethics-history.html. Retrieved on July 24, 2009.

6. Eels, Richard and Walton, Clarence (1961) Conceptual Foundations of Business, Richard D. Irwin, Inc., Homeward, IL.

7. Frederick, William C. (2006) Corporation, Be Good, Dog Ear Publishing, Pittsburgh.


R. Edward Freeman is the Elis and Signe Olsson Professor of Business Administration at the Darden School, University of Virginia, and academic director of the Business Roundtable Institute for Corporate Ethics. He is the author or editor of over 100 books and articles on business ethics and stakeholder theory.

Lisa Stewart is program manager for the Business Roundtable Institute for Corporate Ethics. She is the main author of the Institute's study of a model business ethics curriculum and is responsible for its master's seminar series in business ethics and its Bridge paper series aimed at translating academic business ethics research into managerial language.

Brian Moriarty is associate director for communications at the Business Roundtable Institute for Corporate Ethics. He is a co-author of the recent report, The Dynamics of Public Trust in Business—Emerging Opportunities for Leaders, published by the Institute in partnership with the Arthur W. Page Society.

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