November 2000, Volume 69, Number 1

The Overview David Brady If you're a Nike manager and you're in Vietnam, you don't want to leave the human rights of your workers up to the local government. David Brady FOR ME, ETHICS is the application of moral principles to everyday life and business problems. There are numerous ethical systems-religious systems, semireligious systems such as Confucianism, and the major secular systems: utilitarianism, Kantian rights, distributive justice. What a true ethical system does is allow you to determine a course of action consistent with the set of moral principles you're reasoning from. I've always been a fan of Milton's article and views on corporate responsibility. It is ethical, based on a specified axiom (utilitarianism), and is consistent with economic science. What I like most is it clearly delineates the role of government - government enforces contracts and sets the rules governing fair business behavior. It says that managers are agents, that the principals are the shareholders, and that the rule governing behavior is that the managers should maximize shareholder value. As such, it clearly prescribes the course of action so that when a manager has a dilemma, he/she can determine the appropriate course of action. This reasoning applies in cases where measuring dollar loss can be complicated. For example, in a case like Johnson & Johnson and the Tylenol tampering, the company can calculate the costs of its actions and put it into a framework, and the cost of maximizing profit or gaining credibility can be estimated and the rule applied. A more popular view of corporate responsibility is that of the Business Roundtable in the United States and its idea of stakeholders. Roughly, the idea is customers, shareholders, suppliers, the government, etc., are all stakeholders in the company and as such are all elements that management has a responsibility to. Managers love stakeholder theory, because they can support any action on the basis of what stakeholders say they want. You balance it off and say, "I couldn't possibly do 'x,' because this group wants one thing and the other group wants the opposite." In addition, the statements regarding the nature of responsibility are purposely vague, and such generalizations allow managers to do what they wish and call it responsibility. Now while I like what Milton's done, it does seem that globalization presents a bit of a problem. Operating globally, you have local units that are self-sufficient. The center is weak. Some firms focus on scale and uniformity; others use the supply chain model to tap resources and capabilities anywhere. Nike is a classic example. It wanted the least costly producer, so it went to Japan, then Korea, China, Vietnam, etc. They also were a global brand-the No. 1 producer of athletic footwear and major producer of athletic gear around the world. To do that they had to go local, like supporting soccer in Brazil. This approach decentralizes management. Now, what problems does that create? In the United States and also in Europe, Milton's system works reasonably well. These governments set the rules of what constitutes fraud and liability. But if you're a Nike manager and you're in Vietnam, you don't want to leave the human rights of your workers up to the local government, because, frankly, that's a government which has not been very concerned with human rights in general. This gives managers in some countries different responsibilities. For example, every British Petroleum manager in China is responsible on a biweekly basis for driving out to all the road sites and rural power companies to check and make sure that they're not being built by prison labor. David W. Brady is the Business School's Bowen H. and Janice Arthur McCoy Professor of Political Science and Leadership Values. Milton Friedman Is it unethical for me to be an employee in a factory producing cigarettes? No! But is it unethical for me as a manager to make false statements in public? Yes! Milton Friedman KIRK SAID 90 PERCENT of the time being ethical is consistent with being profitable. I agree with about 90 percent of what everybody has said. Both David and Kirk have referred to an article of mine 30 years ago, and that's how I got into this ethical business, which is not my business-I'm an economist. But about 30 years ago I wrote an article for New York Times Magazine on social responsibility of business ["The Social Responsibility of Business Is to Increase Its Profits," September 13, 1970]. No article I've ever written has yielded me so much money. Not a year goes by that I don't get about $1,000 in fees to reprint it. And the reason is very simple: Business ethics has been a growing subject in business schools. Every business school needs a set of readings on business ethics. Each needs views from left to right, and very few economists were willing to be as extreme as I was. So I had almost a monopoly on the extreme side of the market. I went back and reread this article. I was not surprised that I still agree with it. And I want to read to you both the beginning and the end. Let me emphasize it deals with social responsibility of business, not ethics. Those are two very different things. Here's the first paragraph: "When I hear businessmen speak eloquently about the 'social responsibilities of business in a free enterprise system,' I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned 'merely' with profit but also with promoting desirable 'social' ends; that business has a 'social conscience'; and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution, and whatever else may be the catchwords of the contemporary crop of reformers. In fact, they are-or would be if they or anyone else took them seriously [that sentence is no longer true-people do take them seriously]-preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades." The last paragraph says:  "That is why, in my book Capitalism and Freedom, I have called [the notion of social responsibility] 'a fundamentally subversive doctrine' in a free society [it is an important point related to the globalization problem], and have said that in such a society, 'there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." That's the beginning and the end. And of course most of the difficulty is because no one has read the in between part. That's a discussion of the social responsibility of business. It's not a discussion of what's ethical or not ethical. In my opinion, it's hard to know what is meant by business ethics. Only people, not businesses, have ethics. Ethics is me, the individual, as a person. I'm ethical or unethical. If I'm employed in a business that I think is unethical, I have a clear choice. I can get out of that business and find something else to do. It doesn't seem to me it's ethical for me to do unethical things because the business can let me do it. One common example: Is it ethical to work in a cigarette-producing company? Everybody knows smoking cigarettes is hazardous to your health. So is riding in an automobile. So is skiing. So is swimming. Is it unethical for me to be an employee in a factory producing cigarettes? No! But is it unethical for me as a manager to make false statements in public? Yes! If people want to smoke cigarettes, if someone decides the pleasure of smoking is worth the risk to his health, that's no different than if he decides the pleasure he gets out of skiing is worth the chance he'll go through a tree. That's why it seems most of these difficult problems are not difficult in ethical terms. They're difficult in practical terms. Difficult in knowing what the costs and returns are. A corporation has an obligation to its owners and stockholders to make as much profit as it can while not violating its owners' ethical concerns nor practicing deception or fraud. What that requires will be very difficult to figure out in a place like China. But there I wouldn't say British Petroleum is behaving ethically. I'd say it's behaving responsibly in accordance with its statement it doesn't want to engage in deception. It doesn't want to tell its stockholders, "Your money comes from prison labor." Milton Friedman is a senior research fellow at the Hoover Institution and Nobel laureate. Return to "A Question of Ethics: Part 1" Continue to "A Question of Ethics: Part 3"