DOES BUSINESS ETHICS REST ON A MISTAKE?

John R. Boatright

Abstract- This presidential address to the Society for Business Ethicsargues that business ethics rests upon the mistaken assumption thatteaching and research in the field ought to aim at the incorporationof ethics into managerial decision making. An altemative to this MoralManager Model is a Moral Market Model, in which the aim is todevelop markets that produce ethical outcomes. The differencesbetween the two models are discussed with reference to the themesof responsibility, participation, and relationships

Presidential addresses before professional societies are often appraisals ofthestate of the fieldto successes achieved, to failures (if any), and to thechallenges that lie ahead. By any measure, the academic field of business ethicsis prospering. We can take pride in our accomplishments, including the growthof business ethics courses, the profusion of books and articles, an unending roundof academic conferences (that could inspire David Lodge to write a sequel toSmall World), and the development of journals and societies (especially our ownSociety for Business Ethics and the journal Business Ethics Quarterly).

But what of our impact on business practice? Much of the support for busi-ness ethics derives from the public's expectation that our academic activitieswill trickle down to the real world. In headier moments, we picture ourselves ashigh-minded missionaries, engaged in an arduous struggle to convert a heathenmass from their idolatrous worship of the bottom line. If we are engaged in abattle, the reports from the front are not very encouraging,

Newsweek columnist Robert Samuelson announced m 1993 that the"good corporation"' that provided job security and generous benefits isdead.' Among its successors is the "virtual corporation" made up oftemporarv alliances among small firms and individuals around theworld.-

Financially driven mergers and restructurings are the order of the day,creating ever-larger firms that transcend national boundaries and shedlayers of iinneeded employees in their relentless march to greater share-holder value.

Even giant corporations and nation-states are at the mercy of the worldcurrency market that (like the Internet) is controlled by no one.

1999 Business Ethics Quarterly. \o]ume 9. Issue 4 ISSN 1O52-15OX. pp 583-591

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It is safe once again in corporate America for CEOs to declare that theirjob is to serve only the shareholders. "Chain Saw Al" Dunlap's proudadvocacy of "mean business" is very much in vogue (even if "ChainSaw Al" himself has been felled with his own favored implement) .^

As "baby boomers" save feverishly for retirement, they have come toexpect 25 percent annual gains in their pension accounts, regardless ofthe consequences. As Pogo said, "We have met the enemy and he is us."

Whether we in the field of business ethics have had any beneficial impactdepends very much on what counts as an improvement. Exactly what is it thatwe are trying to achieve? Although each of us would probably give a slightlydifferent answer to this question, there is a rough consensus. We tend to focus inour teaching and research on the high-level corporate manager, typically a CEO,who shapes the environment of an organization and makes the key strategic de-cisions. On the conventional view, this manager acts on competitive marketconsiderations within the limits set by law. The objective is clear: Make as muchmoney as you can without breaking the law! Or perhaps the objective is: Makeas much money as you can and still get away with it!

The field of business ethics offers a counterviewthat ethics ought to beincorporated into management decision making and organizational design. Man-agers ought to consider ethics along with law and profits, and they should createorganizations in which ethics plays a vital role.

I could cite many expressions of this view, but let me single out just one. KenGoodpaster labels the conventional view, in which ethics is merely a systemicconstraint. Type 2 thinking.'' The aim of business ethics, he claims, is to movemanagers to Type 3 thinking, in which ethics is an "authoritative guide." Profitand law are not ignored in Type 3 thinking , he says, but "respect for the rightsand concerns of all affected parties is given independent force in the leader'soperating consciousness."'

The view that I am describing has no name, so let's call it the Moral ManagerModel. On this model, the moral manager is not one who merely acts morallybut who thinks morallythat is, who actively includes moral considerations inbusiness decision making. And the goal of business ethics is to turn out moralmanagers, that is, skilled moral reasoners.

Since I am going to throw stones at this view, let me admit that I am notwithout sin. In the first chapter of my textbook Ethics and the Conduct of Busi-ness, I introduce the economic, legal, and moral points of view and recommendthe integration of ail three.^ What I call an "integrated approach" closely re-sembles Goodpaster's Type 3 thinking and the Moral Manager Model.

I now think that this view is mistakenor at least in need of substantial quali-fication. If the Moral Manager Model captures what business ethics is all about,then, I contend, business ethics rests on a mistake. But what's wrong with thisview? It IS so deeply ingrained in the business ethics literature that its truthmight seem obvious. And what is the alternative? What should business ethicsbe about if not this?

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First, if the Moral Manager Model describes the aim of business ethics, thenwe are fighting a losing battle. The most admired corporate executives fit theconventional view of the hard-headed, business-savvy decision maker. And thereports from the front do not describe trends that favor the Moral Manager Model.

The Moral Manager Model has its exemplars. Aaron Feuerstein of MaidenMills (who was our keynote speaker at last year's meeting) and Robert Haas ofLevi Strauss are successful business leaders who explicitly incorporate ethicalvalues in their decision making. Many of us teach the Principled ReasoningApproach that Levi Strauss used in deciding whether to continue sourcing inChina.^ (I will not comment on the recent reversal of their initial decision towithdraw.) We need to ask, however, whether Aaron Feuerstein and Robert Haasare role models for all corporate chiefs, or whether their management styles areto be recommended only under certain circumstances. Do they represent an op-tion or a moral dictate!

Second, the Moral Manager Model applies primarily to high-level decisionmakers in large business organizations. Most people in business are Indians, notchiefs. The vast majority of people in this country are employed in small- andmedium-sized firms, many in non-business organizations, including government.Many people are self-employed or joined in ventures. The Moral Manager Modeldoes not speak to their situation.

Third, we all engage in business activity, not only as employees but as con-sumers, investors, and in a variety of other roles. Each one of us runs a smallbusiness., known as a household. The word economics, as we all know, derivesfrom the Greek term for household management. In thinking about the MoralManager Model, I have paused to reflect on how I conduct my own life. I con-sider myself to be a reasonably good, ethical person and a pretty good ethicalreasoner. Yet, I realize that I conduct business activity mainly as a typical homoeconomicus. As the manager of a household, I employ maintenance and repairworkers; I buy groceries and other supplies; I borrow money from lenders. Ineach instance, I act and think as a market participant who strives to obtain thebest value. Faced with this realization I have to ask myself: If this is how Iconduct my life, why should I expect the manager of a business organization toact differently? What's wrong with managers being primarily economic actors?Why should they be moral philosophers as well?

The Moral Manager Model rests, I believe, on the assumption that the busi-ness organization is the fundamental unit of analysis for business ethics and thata business organization is directed by its top executives. As a result, the centraltask of business ethics becomes how to introduce ethics into corporate decisionmaking, which is to say the thought processes of managers.

This focus on the organization and its leaders is exemplified by the cases thathave powerfully shaped our conception of business ethics, such as the successstories of James Burke at Johnson & Johnson and Roy Vagelos at Merck, or thecautionary tales provided by the Ford Pinto and Nestle infant formula episodes.These kinds of cases suggest that the introduction of ethics into business must

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overcome two main obstacles. One is the logic of bureaucracy, which has beenexplored in business ethics by John Ladd and Robert Jackall in influential works.*The other is the logic of the marketplace.

Bureaucracies and markets each have an ideal of rationality. In the face ofthese two "logics," the fundamental problem of business ethics underlying theMoral Manager Model can be further characterized as introducing ethics intoorganizations that already embody two powerful ideals of rationality. The ratio-nality of ethics needs to be combined somehow with the logic of bureaucracyand the logic of the marketplace.

What's the alternative to the Moral Manager Model? The alternative is a con-ception of business ethics that focuses on individuals acting in a marketplace.Markets rather than organizations would be the focus of business ethics. And thefundamental problem is how to create moral markets.

Of course, the justification of market activity is the point of Adam Smith'sfamous "invisible hand" argument. By seeking personal gain in market exchanges,a person "is led by an invisible hand to promote an end which was no part of hisintention." We point out to our students that this argument presupposes efficientmarkets and effective regulation. And many ethical problems in business arisefrom market and regulatory failures. Many of the leading questions for businessethics ask how best to overcome these failures.

The Moral Manager Model places the responsibility on the leaders of busi-ness organizations and seeks to influence their discretionary decision-makingauthority. The model I proposelet's call it the Moral Market Modelwouldplace responsibility on all of us to improve the business system. That is, to cre-ate more efficient markets and more effective regulation.

Let me illustrate the Moral Market Model and contrast it with the MoralManager Model by briefly considering three prominent themes in business eth-ics, namely responsibility, participation, and relationships.

One recurrent theme in business ethics is that individual responsibility hasbeen lost in the modern business system and ought to be restored. Robert Jackall,in his analysis of corporations, documents the myriad ways in which individualresponsibility is diffused and evaded.* Ambrose Bierce in The Devil's Dictio-nary defines a corporation as "An ingenious device for obtaining individual profitwithout individual responsibility.""'

Echoing Bierce, Alan Wolfe describes the corporation, on the standard eco-nomic view, as "a device through which human beings, who have moralobligations, come together for the purpose of ridding themselves of their capac-ity to exercise moral obligations."^^ The corporation, he adds, is a "mechanismof responsibility displacement," and, he continues, "If chimpanzees could betrained to count, they would be just as good, if not better, managers than humanbeings."'^

The Moral Manager Model reflects these sentiments and offers a corrective.A moral manager is one who takes individual responsibility and thereby becomesmore fully human, more than a counting chimpanzee.

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The Moral Market Model does not dismiss individual responsibility as unim-portant but stresses the importance of role responsibility in economicorganizations. In order to enjoy the benefits of joint production, we commit our-selves to certain roles and bind others to their roles. And we expect everyone,ourselves included, to fulfill their obligations in those roles. Without a system ofrole responsibility, large-scale business organizations and a global market sys-tem would be impossible. On the Moral Market Model, individual responsibilityenters into the picture at the beginning, when we create roles and commit ourselvesto them. Once these roles are assumed, individual responsibility has limited scope.

The Moral Market Model's emphasis on role responsibility encourages amarket system and a system of corporate governance that minimizes individualdiscretion and favors rules. William Baumol in his book Perfect Markets andEasy Virtue: Business Ethics and the Invisible Hand., observes: "The invisiblehand does not work by inducing business firms to pursue the goals of society asa matter of conscience and goodwill. Rather, when the rules are designed prop-erly it gives management no other option."" Instead of "Increase responsibility,"the motto ofthe Moral Market Model, then, might be "Reduce options."

Two examples can serve to illustrate the different approaches ofthe two modelswith respect to responsibility. First, the American Law Institute's proposed Prin-ciples of Corporate Governance includes a controversial section 201 (b) that wouldpermit managers to "take into account ethical considerations that are reasonablyregarded as appropriate to the responsible conduct of business." In short, man-agers should have the freedom to act responsibly! Who could possibly opposethis? This section is perfecrly in accord with the Moral Manager Model. However,from a Moral Market perspective, the adoption of the ALI proposal would free man-agers from their role responsibility. And that would make them not more responsiblebut less so. The danger of section 201(b) is that it would upset the carefully definedsystem of rules that keeps managers restrained, to serve society's interests.

Second, the Federal Sentencing Guidelines (also known as the Ethics Con-sultant Full Employment Act) has been criticized because it makes the adoptionof ethics programs a matter of expediency rather than conviction. The MoralManager Model would have managers institutionalize ethics because that is theright thing to do, not because it provides legal protection. The approach of theFederal Sentencing Guidelines is right m line with the Moral Market Model,however, because of its emphasis on creating market incentives.

Turning now to the theme of participation, the Moral Manager Model recog-nizes that business organizations are undemocratic but insists nonetheless thatevery group has a right to participate m decisions that affect them. In the ab-sence of effective participation in decision making, managers should at leastconsider each group's interests. This kind of consideration is an essential com-ponent of Goodpaster's Type 3 thinking and also of stakeholder theory.

The Moral Manager model encourages participation in corporate decisionmaking. By contrast, the Moral Market Model emphasizes participation in mar-kets. Not only do we participate actively in markets as consumers and investors.

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and perhaps as providers of goods or services, but business organizations them-selves are a kind of market in which we participate as employees.

The two models offer differing prescriptions for increasing participation. TheMoral Manager Model favors more inclusive decision making. Thus it applaudswider representation on boards of directors, other constituency statutes, and thelike. Despite this call for greater inclusiveness, the Moral Manager Model isstill highly paternalistic. In contrast, the Moral Market Model would removeareas of decision making from managers and place them in other hands. Mean-ingful participation on this model is the opportunity for each group to achieveits own ends through participation in a market system.

Dan Gilbert makes this point in a critique of Goodpaster's proposal for Type3 thinking. Although Goodpaster's project is motivated by the attempt to intro-duce respect for persons into the corporation, Gilbert charges (correctly, I believe)that it reflects a "profound disrespect" for persons as beings capable of pursuingtheir own ends.'* The alternative for Gilbert is a conception of the corporation inwhich individuals become independent by bargaining with others. This I inter-pret as something akin to the Moral Market Model.

Let me offer two quick illustrations of the differences between the two mod-els with regard to participation. Traditional corporate pension plans place controlin the hands of managers and thereby create an obligation for them to act re-sponsibly. This is in accord with the Moral Manager Model. With the increasingavailability of portable, fully vested pension plans, employees are now freedfrom a reliance on the good will of management and given the power to controltheir own funds. This latter approach, I suggest, is more in keeping with theMoral Market Model.

In a similar vein, secure employment in the American workplace has beengiving way to the concept of employability, whereby employees and employersalike have an obligation to maintain marketable skills. Making secure employ-ment a corporate objective accords with the Moral Manager Model by puttingresponsibility in the hands of management. By contrast, enabling people to man-age their own careers presents a Moral Market Model solution.

Finally, I come to the theme of relationships. Business ethicists have rightlyseized upon the importance of relationships in business and the role that integ-rity, trust, and care play in developing and sustaining relationships. By so doing,the field of business ethics has been able to make a significant contribution,primarily because of the neglect of relationships in neo-classical economic theoryand the practice of American management.

The Moral Market Model does not neglect relationships but regards themdifferently. First, some business ethicists appear to regard relationships in busi-ness as having inherent value. We value relationships in our private lives becausethey are essential to our search for meaning and fulfillment. To have relation-ships is essential for being human. It does not follow, however, that relationshipshave the same value in business.

DOES BUSINESS ETHICS REST ON A MISTAKE? 589

In some parts of the world, relationships are essential for doing business.This sometimes takes the form of "crony capitalism," and we see the fruits ofthis today in the wreckage of some Asian economies. An often-praised feature ofthe Japanese economy is the close relationships that consumers develop withretailers. The comer gas station provides solicitous, personal service for the priceof an expensive fill-up. In recent years, however, Japanese consumers have shownthat they don't want a relationship with the comer gas station. They prefer cheapfuel in a quick, impersonal market exchange. You may recall the time when Al-ice, in the Dilbert comic strip, was scheduling Saturday morning meetings becauseshe didn't have a life outside work and wanted the human contact.

On the Moral Market Model, the ideal business relation is not an open-endedrelationship but a fully-defined contractual relation. Unfortunately, completelyplanned business relations are not possible for many reasons, the prime onesbeing the complexity of business situations, incomplete knowledge, and uncer-tainty about the future. A major challenge for business is to structure relationshipsthat compensate for the inability to write precise contracts. This task is the cen-tral concern of agency theory.

Two points should be observed here. First, on the Moral Market Model, rela-tionships are best avoided. They existor should existonly to the extent thatprecise contracts cannot be written. Second, many means exist for structuringbusiness relationships where precise contracts are not possible. Integrity, trust,and other ethical supports for relationships may be effective in some situations,but they are not always essential to business relationships nor the most effectivemeans available.

These two perspectives on relationships have very practical implications forregulation. Both self-regulation and government regulation have ranged betweentwo sets of polar opposites. The two poles in self-regulation are informal andformal modes of social control. And government regulation in the United Stateshas alternated between the two poles of trust and contract approaches.

Sociologists have observed that as societies become more complex, they movefrom informal social control based on personal relations to formal controls basedon impersonal contracts,'^ Whereas simpler natural communities tend to restrainself-interest by developing social bonds, more complex artificial societies at-tempt to channel self-interest in socially beneficial ways. The history of Americanregulation reveals two opposing approaches to regulation. One is a trust approach,which makes managers trustees or fiduciaries whose conduct is bound by socialnorms. The other is regulation by means of contractual relations that operate bymarket rules.'^

In general, the Moral Manager Model involves a preference for informal modesof social control and a trust approach to regulation, whereas the Moral Market Modelfavors formal modes of social contiol and a contract approach to regulation.

I would like to conclude hy speculating on the motivation for the Moral Man-ager Model. Why has it dominated thinking in the field of business ethics? 1 see

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two motivating forces. One is a distrust of markets and a belief in the need for aguiding hand. The moral manager is thus a part of Alfred Chandler's "visiblehand" that complements the invisible hand of Adam Smith. ^ ^ The other motivat-ing force is the communitarian impulse, which resists the movement toward masssociety, in which personal and informal relationships are replaced by imper-sonal, contractual relations. Communitarianism stresses the themes ofresponsibility, participation, and relationships that I have discussed.

Finally, it has been observed that the depiction of a corporation as a commu-nity that reflects the values of its top executives is an application of the policyframework developed at the Harvard Business School.^ ^ The dominance of theMoral Manager Model, therefore, might be attributed to the influence of Harvard.The Moral Market Model, on the other hand, reflects more the thinking of theChicago school of economics. The Moral Market ModeK which I am proposing,is in an early stage of development. I cannot describe it fully. But I invite each ofyou, now sitting comfortably here in San Diego, to join me in moving awayfrom Boston in the direction of Chicago. In doing so, you will be taking anexciting intellectual journey that promises to change the direction of the field ofbusiness ethics.

Notes

This paper was presented as the Presidential Address to the Society for Business Ethics,at the Annual Meeting m San Diego, California, August 8, 1998.

Robert J, Samuelson, "R.l.P.: The Good Corporation," Newsweek, July 5, 1993, p. 41.^See William H. Davidow and Michael S. Malone, The Virtual Corporation (New York:

HarperBusiness, 1992)^Albert J. Dunlap, Mean Business (New York Random House, 1996).Kenneth E. Goodpaster, "Ethical Imperatives and Corporate Leadership,"' m Business

Ethics: The State of the Art, ed. R. Edward Freeman (New York: Oxford University Press,1991)

^Goodpaster, "Ethical Imperatives and Corporate Leadership," p 976John R. Boatright, Ethics and the Conduct of Business, 2nd ed. (Upper Saddle River,

N J.: Prentice Hall, 1997), p- 19'"Levi Strauss and Co.: Global Sourcing (A)," Harvard Business School, 9-395-127^John Ladd, "Morality and the Ideal of Rationality m Formal Organizations," Monist 54

(1970), Robert Jackall, "Moral Mazes. Bureaucracy and Managerial Work," Harvard Busi-ness Review, September-October 1983

'Robert Jackall, Moral Mazes- The World of Corporate Managers (New York' OxfordUniversity Press, 1988

10Ambrose Bierce, The Devil's Dictionary (New York: World, 1911)."Alan Wolfe, "The Modern Corporation Private Agent or Pubhc Actor''" Washington

and Lee Law Review 50 (1993) 1686 (italics in the original),e, "The Modern Corporation," p 1686

DOES BUSINESS ETHICS REST ON A MISTAKE? 591

'^William Baumol, Perfect Markets and Easy Virtue: Business Ethics and the InvisibleHandiOxioTd- Blackweli, 1991), p. 53

'*Daniel R Gilbert, Jr . "Respect for Persons, Management Theory, and Business Eth-ics," in Business Ethics: The State of the Art, ed. R. Edwaid Freeman (New York. OxfordUniversity Press, 1991), p. 116.

'-'For an example, see E A. Ross, Social Control (New York. Macmillan. 1901)'^The distinction is due to Adolf A. Berle. Jr. and Gardiner C Means. The Modern Cor-

poration and Private Property (New York: Macmillan. 1932)'^Alfred D. Chandler, The Visible Hand- The Managerial Revolution in American Busi-

ness (Cambridge: Belknap Press. 1977).'^Gilbert, "Respect for Persons. Management Theory, and Business Ethics," p 113.