Covid has created a business ethics crossroads
This is a guest blog from Muel Kaptein, Professor of Business Ethics and Integrity Management at Rotterdam School of Management, Erasmus University. His research interests lie in the area of ethics management, compliance programmes and soft controls. Muel is section editor of the Journal of Business Ethics. He teaches courses in CSR, leadership, and business ethics. He is also a partner at KPMG where he helps organizations in developing and auditing their integrity.
Covid has created a business ethics crossroads
As an academic discipline, the field of business ethics has been around for 40-odd years. It emerged in the 1980s through the establishment of journals and conferences. At that time, businesses were beginning to take notice. Many companies created a code of ethics, a manual to employee morality. Despite this explicit definition of ethics, a swathe of corporate crises and scandals from Enron to WorldCom underpinned how important it was to put the theory into practice.
From the 2000s, we saw organizations focus on establishing an ethics programme to implement their codes of conduct. Companies cultivated an ethics committee, while many also pioneered a new role: the chief ethical officer. Organizations also put on ethics training, introduced ethics screening and an ethics hotline. This did not go far enough, however. The global financial crisis of 2007-08 that was sparked by the collapse of Lehman Brothers and plunged the world economy into chaos, exemplified a failure of corporate culture. Lehman Brothers had a beautiful code of ethics and a great ethics programme, but this failed to prevent the lack of ethical behaviour among its bankers and executives, at great cost to society. Following a public outcry, regulators began to clamp down on ethical malpractice. As public opinion shifted, we witnessed a pivot away from the shareholder primacy doctrine, pioneered by the late economist Martin Friedman, to a cuddlier form of capitalism in which all stakeholders – employees, customers and suppliers – are considered in business decisions. Profit at all costs was going out of fashion, a trend compounded by growing social unrest over a potential climate catastrophe. This boded well for the once fringe discipline of business ethics, which was rapidly rising up the corporate agenda.
“The longer the coronavirus crisis continues, the more business ethics will be placed under pressure.”
Then COVID-19 struck. The pandemic, and government measures to stem the spread of coronavirus, are a real test case for business ethics. This is a pivotal moment in corporate history. In some ways, companies have proven their commitment to ethics by putting people before profits. Staff and customer safety has been the overwhelming priority, and many firms have cut executive pay rather than pass on rising costs to cash-strapped consumers to boost the bottom line. Those with the broadest shoulders have carried the biggest burden. Now companies are at a crossroad. The first wave of coronavirus saw governments and central banks flood economies with liquidity, bailing out companies on the brink of bankruptcy and propping up the wages of millions of workers. Public debt, however, is rising to unsustainable levels. The music will eventually have to stop.
And the pain could get worse if we see a winter resurgence of COVID-19 and more lockdowns. As corporate coffers begin to run dry, companies may be forced to prioritise their survival. That will mean mass redundancies, raised prices and less money to pay suppliers through the value chain. The longer the coronavirus crisis continues, the more business ethics will be placed under pressure. It could be the second coming of Friedman. That said, if government intervention falls short, we might see private sector organizations step in to fill gaps in support. Many companies want to help build back our economies better, more sustainable and resilient than before the pandemic upended the world. That will mean developing fresh products and services that are more environmentally friendly, for instance, or embracing new sustainability regulation rather than lobbying against it.
Driving positive change
In academic circles, we call this moral entrepreneurship, a term that I coined in a 2019 article published in the Journal of Business Ethics, whereby companies define their own ethics and drive positive change in broader society by cultivating followers inside and outside of the organization. At RSM, we strive for leadership in ethics and to educate the next generation of business leaders who will make a positive impact in the world. For instance, in September 2020 we introduced a new course called Responsible Business Leadership. One of the learning goals is that students are able to defend their own view of how companies can contribute to solving issues of sustainability. Another learning goal is that they are able to create a plan for contributing to solving these problems.
At an organizational level, moral entrepreneurship can be achieved through greater engagement with stakeholders – not just shareholders but everyone who contributes to the success of an enterprise. This will create companies that reflect the values of wider society, ones that are more inclusive, transparent and fair. I believe that all organizations will need to do this at some point in order to obtain the moral licence they need to operate in society today. By defining a purpose and mission, companies gain legitimacy.
There are myriad fresh examples of this in the corporate world today. For example, streaming platform Netflix has announced that it will stop charging inactive customers. Unilever has pledged to stop targeting children with its advertisements. And some Japanese trading houses are telling managers to break with the tradition of Nomikai – inviting their employees for drinks after work.
I do not believe that profit and purpose can be mutually exclusive. The companies of today that will be successful tomorrow are those that focus on both of these two important factors.
Business ethics will be at the heart of this fresh approach to management. But there is a paradox. Being ethical means doing the right thing irrespective of the financial outcome. If companies pursue ethics to become more commercially successful, they will have failed. But companies are now waking up to a broader definition of success. No longer is making a massive profit or raising the share price the benchmark of commercial viability. A fresh definition of success is being written, one where the gold standard is sound ethical practice.