Do Business Ethics Matter?

But should corporate captains look at shareholder value as the only lighthouse while steering their ship? Maybe not, if Prof David Sharps thought-provoking work on business ethics is considered. I had a stimulating session with the young professor, who teaches at the Richard Ivey School of Business, which is one of the best business schools in Canada.

What do we accept as the legitimate and moral way of doing business? Since the second World War, says the professor, two main paradigms of management thinking and values have emerged. One, the Yankee model of competition (also referred to as the capitalist model), which thrives on efficiency, competition and the primacy of markets. In this model, the Market is King, and the firm is just a black box. It is an impersonal way of doing business.

Contrast that with the Asian model, where people matter, relationships too matter and collaborations are crucial. This Asian model worked well till some six months ago. We are now beginning to discover that it is a model, where lending on the basis of who you are as opposed to what you want the money for, is no better.

The Wests infatuation with the Japanese miracle, which stressed on efficiency and a set of values that was all about co-operation, is now almost over. It is now amply evident that neither the capitalist efficiency-driven values model or the Asian collaborative model is complete. They both have deficiencies.

There is now a third way of doing business emerging in North America. It is driven by the concept of the ethical corporation or the values-driven corporation, which is a corporation that has a social point of view. It still has a responsibility to make profits, but increasingly such firms are recognising that businesses have a social responsibility. Corporations that accept this model of social responsibility are showing what it takes to be successful.

For instance, in North America, Ben & Jerrys ice-cream company never set out to make a lot of money. Their objective was to do a lot of other things. But guess what, in the course of doing that, they did make a lot of money.

Mind you, it is a very well-managed, tightly controlled company. But it operates through relationships with their suppliers. They dont expect farmers to compete for milk with the lowest cost. Instead, they operate in the Asian way where they have long-term contracts with suppliers. They pay their suppliers more than they need to, in order to encourage them to produce the best quality, rather than the best quality at the cheapest price. Body Shoppe is another one, which holds itself up as a paragon of virtue.

There are obvious dangers in following this model. Thats because it is very dependent on corporate reputation. If you do anything to harm that reputation, it could kill you. In the West, customers are increasingly sensitive to the companies that they buy from. Thats not to say that brands arent important, but corporate reputation matters. Increasingly, customers are becoming socially responsible and are forcing companies to do the same thing.

Remember the classic case of the Tylenol scare, where J&J immediately took back stocks worth millions of dollars, when it discovered that the brands packaging had been tampered with cyanide. Despite the incident, J&J managed to maintain its reputation as an ethical company, and Tylenol emerged unscathed. No wonder then that J&J has an excellent reputation in the West. The organisation is tightly bound by a credo and a set of beliefs on how managers in the company will operate. Today, every professor of business quotes it as an example of how a corporation ought to behave. The mileage J&J got out of it is far greater than what they ever expected.

The automobile industry is yet an example, which is quickly learning that it makes little sense to compromise on safety. After the A-Class fiasco, Mercedes now knows that the adverse publicity is far more costly than losing the its reputation.

But how do you create an organisation where everyone in the organisation knows that the company will conduct business only in a certain way, that business has a certain moral standard or a moral point of view and that everyone in the company will abide by it?

You start at the top, says Prof Sharp. The tone at the top is vital. In these ethical corporations, managers know that the shareholders is no longer king. He is a very important stakeholder and delivering adequate shareholder returns is crucial. But guess what? The way to achieve those shareholder returns, is not a narrow focus on lowest cost or productivity and all those good stuff, but also one focus: the responsibility to the society at large, a willingness for the corporation to take a large short-run hit, if that is in the best interests of consumers.

Are Indian CEOs listening?