Business Ethics 101

As a Christian I believe that morality exists. I believe that there is a metaphysical definition of right and wrong that transcends culture and personal preference, and I believe that people ought to do what is right. But morality isn't popular in all circles (even the word morality has taken on a negative connotation). In particular morality and ethics are unpopular in business and economics.

I went to a lunch seminar a couple of weeks ago where three of the top University of Chicago finance professors discussed their views on ethics in light of the Financial Crisis. Two of these professors rejected the idea that ethics had any place in business or economics. They believe that the economy is driven by incentives and self-interest. It would be ignorant to believe otherwise, and destructive to try and impose a system that misdirects self-interest. Instead, they suggested that morality in business is self-regulated because corporations and executives value their reputations. Corporations won't break the law (or at least they won't do it in a gross and noticeable way) because such action would compromise their reputations and cause their customers to shop elsewhere. Executives won't make decisions that hurt their employees or that harm consumers because they value the reputation of their companies (meaning, they value their salaries), and they value their own reputations as businessmen and women.

If you don't work in the business world, you can probably identify the gaping holes in this argument without trouble. There are numerous real world examples where businesses have compromised their reputations to increase profits, and the argument does not account for goods and services that are not sold to the general public. Certainly, if a newspaper reported that Mattel was using sweatshop labor, or even slave labor, to produce its toys, then consumers would respond and punish Mattel by not buying its products.

(Mattel doesn't pay great wages, but the company does better than most regarding overseas work conditions--mostly due to consumer backlash against sweat shops. See this NYTimes story.)

But what about a company that does not sell to Jane and John Smith, where public backlash does not affect profits?

Impact on reputation is not an appropriate or effective measure of whether a business action is wrong or right, and I think deep down my professors know that. The other presenter, Luigi Zingales, took the most balanced perspective on business ethics. He confessed his uneasiness with the idea of self-regulated self-interest, citing the fact that businesses are composed of people, and these people are influenced by their surroundings. Without an ethical norm, employees could easily slide down the slippery slope to illegal behavior, if not immoral behavior. Dr. Zingales was troubled, but he had not yet found a satisfactory answer to the problem of ethics in business.

I sympathize with Dr. Zingales. Ethics and morals are metaphysical, and American business is anything but metaphysical. How do managers enforce an ethical code without reference to some greater ethical norm prescribed by a religion or philosophy? I'm not sure.

What do you think? Is morality necessary in the business world? If so, how should we to measure morality?