Business Ethics: Scandals and Standards

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Corporate scandals! Most everyone has heard of Enron, the now defunct Houston-based energy-trading company. Many will have heard of WorldCom, Tyco International, Adelphia Communications, HealthSouth, and others, and of the associated shortcomings of their corporate leaders. The ongoing stock-options-backdating affair has embroiled hundreds of executives and has led to a number of high-profile resignations. Responding to corporate scandals, Congress passes more stringent legislation, corporations spew out voluminous ethics codes--merely having them provides some legal protection! Business schools integrate "ethics" into their undergraduate and graduate offerings.

But something bothers me about this ethics bandwagon, and it is not merely that "ethics" is taught in B-school. (If I had my druthers, students would take a full-bore ethics course from the philosophy department, with a qualified PhD philosopher at the head of the class.) No, what bothers me is that business and the lack of ethics appear conflated in the public mind. What good can one expect of business? "They" are all out to get rich at customers', vendors', shareholders', and taxpayers' expense. Academics seem no less afflicted by this sentiment than the public at large. But this perception is nonsense (most business people behave ethically) and amounts to looking at ethics through seriously flawed spectacles.

Ethics lapses are in fact widespread. The midterm election in November 2006 was, in part, a vote on the unethical conduct of a number of U.S. politicians. The Wall Street Journal recently carried several articles on ethics in the religion industry. One reported on pastors plagiarizing each others' sermons. Because "truth is truth, there's no sense reinventing the wheel," argues one pastor. Following that logic, it would not matter if I copied your scientific work and published it as my own or read a textbook to my students without adding my own thoughts. I would just be spreading the truth. But we scientists and scholars are not immune to ethics challenges: data manufacturing is, sadly, part of our line of business. One need only read Science regularly to keep up with the fraudulent behavior of some of our colleagues. The medical, pharmaceutical, legal, education, and other industries also contribute to unfavorable ethics headlines. In a word, every profession runs into ethics troubles. Ethics, or the lack thereof, is not a monopoly of business.

ORIGINS OF ETHICS

Ethics refers to a fundamental issue of human behavior and of the societies that we form. Curiously, this is where economics enters. In contrast to ethics as an academic discipline ("the study of standards of conduct and moral judgment," my dictionary says), economics is generally about actual behavior, not standards of behavior. Still, a question that does interest economists is why standards--any standards--are formed, how and why standards become standards, and why people engage in standard-conforming or standard-violating behavior. Economist and mathematician Ken Binmore, in his excellent, provocative book Natural Justice (Oxford University Press, 2005), suggests that ethical standards or norms, rather than being deducible from reason alone as certain philosophical traditions would have it, evolve. He proposes to examine the development of ethical standards in the same way that life scientists examine natural phenomena. Binmore is looking for natural laws, not supernatural ones--physics, not metaphysics--that would explain the evolution of norms in social species such as ours. In particular, he claims that norms of fairness ("justice") evolved to select from among an "infinity of efficient equilibria of the repeated game of life played by our prehuman ancestors." Now there is a thesis to titillate one's synapses!

Put crudely, codes of ethics are "efficient" inasmuch as they permit societies of individuals that adhere to a particular code to prosper, successfully reproduce, and obtain a growing share of the overall population. …