When corporations treat society like casinos

People joke that there is no such thing as “business ethics.” They call it an oxymoron – a concept that combines contradictory ideas. Sadly, the critics are right. Changing that may require holding those guilty of unethical behavior personally responsible for their actions.

In just the last several weeks a former peanut company owner was sent to prison for 28 years for his role in knowingly selling salmonella-tainted peanut butter that killed nine people. Volkswagen, the world’s biggest automaker, had software in the firm’s diesel-powered cars that cleverly put a lid on emissions during testing. Turing Pharmaceuticals jacked up the price of a 62-year-old lifesaving drug from $13.50 to $750 a pill. And the beat goes on.

All these examples capture the zeitgeist of an unethical, winner-take-all business climate in which bottom line-obsessed high flyers treat society like a giant casino and give the public the middle finger. Is it any wonder that business leaders are among the nation’s least trusted groups, ranking only slightly ahead of members of Congress?

People’s trust in business and those who lead it is eroding. It seems to many that executives no longer run their companies for the benefit of consumers or even shareholders and employees, but rather for the pursuit of personal ambition and financial gain.

In the wake of recent corporate scandals, it is again time to ask the most fundamental of questions: What is the scope of corporate social responsibility?

Maximizing shareholder value has for decades been executives’ top priority. Milton Friedman put it succinctly in a famous New York Times Magazine piece: “The Social Responsibility of Business is to Increase its Profits.” He referred to the concept of businesses having social responsibility as a “fundamentally subversive doctrine.” For Friedman, the role of business was clearly not to act as a social worker.

This formulation is one side of an ongoing debate regarding corporate responsibility. Milton Friedman’s formulation overlooks the fact that, as shareholders’ agents, business leaders have important responsibilities that extend beyond maximizing stockholder wealth. Simply put, many people believe that corporations are licensed by society to pursue profits with the expectation that they will produce goods and services that are of value to society.

Corporations should also remember that the way to maximize shareholder value is by maximizing customer satisfaction. Or as Peter Drucker, hailed as “the man who invented management,” put it, the purpose of business is to create and keep customers. For him, shareholders benefit when customer satisfaction: is the major priority.

While there are no black-and-white judgments, corporations can reasonably be expected to identify stakeholders beyond owners and investors, such as customers and employees.

Balancing shareholders’ expectations of maximum return against other priorities is a fundamental problem confronting corporate management. For starters, being responsible means obeying the laws and also behaving in a fashion that society universally values even if it is not required by law.

Believing that the markets will eventually sort the good from the bad is naive. What the public can now see, in hindsight , is that discussions about market discipline and increased government regulation are endless and don’t amount to much.

With the rise of institutional investing represented by large private and public pension funds, ownership in many large corporations is concentrated in the hands of a relatively small number of investors. The public may well have to rely on these investors to monitor managerial misconduct and corporate social responsibility before embarking on another wave of regulatory reform.

Of course, the dearth of personal risk associated with performance failures increases the incentives for corporate misbehavior and argues for personal punishment of the perpetrators. Real punishment may not cure the disease that lies at the core of the business culture and create a new vision of corporate responsibility, but behaving responsibly would surely be taken more seriously by all concerned.

Originally Published: October 24, 2015

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