Article 7
AQ
Do Good Ethics
Ensure Good Profits~
IN business
A RECENT schools,
survey and members
of senior of Congress,
executives, deans 63
of
percent said they believed that "a business enter-
prise actually strengthens its competitive position by
maintaining high ethical standards:'
But in a recent article in the Los Angeles Times,
Prof. David Vogel of the University of California at
Berkeley writes: "The relationship between ethics and
profits is a rather tenuous one .... Being 'ethical' or
'responsible' is no more or less likely to be rewarded
in the marketplace than is investing heavily in re-
search and development or having excellent labor re-
lations. Ethics are certainly not a barrier to financial
success, but neither are they a prerequisite to if'
Business and Society Review asked a group of ex-
perts to respond to Professor Vogel's assertions. Do
ethics and profits always go hand in hand? We re-
ceived the following responses:
When Is Enough?
Peter Barnes is president of Working Assets FUnding
Service:
To be "ethical" as a business because it may in-
crease your profits is to do so for entirely the wrong
reason. The ethical business must be ethical because ~
it wants to be ethical. If, as a consequence, its profits
are reduced, it must accept such a trade-off without
regret. Of course, companies must be profitable in or-
der to attract capital, stay al ive, and grow. For better
or worse (and I believe it's for the better), that's the
way the game is played in non-Communist countries.
That's the price, in effect, for economic autonomy.
But it does not follow that maximizing profit need
be the aim of every business. My personal view is that
profit is a means to other ends, not an end in itself.
The "ends" of an enterprise should be what you want
Originally appeared in Business and Society Review, Summer 1989, pp. 4-10. Business and Society Review, a quarterly
22 journal of corporate social responsibility and ethics.
A
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to do (e.g., make the best pizza in town) and how you
want to do it (e.g., with concern for the humanity of
your employees). Implicit in this is the principle that
sufficient, not maximum, profit is the appropriate goal
for ethical businesses. (I realize there is a difficulty
here for publicly held businesses; they may not have
the freedom that privately held companies have to
pursue sufficient rather than maximum profit. For
publicly held companies, it may be necessary to per-
suade stockholders that ethical conduct does in fact
maximize profit.)
My own company, Working Assets Funding Service
(which is privately held), sees itself as having two bot-
tom lines. One measures the extent to which reve-
nues exceed expenses. The other measures our social
and political impact. If we do well on the former and
poorly on the latter, we're not succeeding. (We make
our political impact by providing easy-to-use
donation-linked services - like credit cards, airline
tickets. and long-distance calling - that raise funds
for progressive nonprofits at no cost to them or to our
customers.)
If willingness to see profit as a means rather than as
an end is a prerequisite for ethical businesses, the
deeper question still remains: What do we actually
mean by ethical business conduct? I suspect there are
as many answers to this question as there are people
who consider themselves ethical. My Webster's Un-
abridged defines ethical as "conforming to the stand-
ards oi conduct of a given profession:' That doesn't
help much. My own opinion is that ethics in business
means more than just conforming to prevailing stand-
ards or laws. It means approaching business in the
spirit oi service rather than self-enrichment. It means
always viewing your enterprise as contributing to
rather than extracting from society. It means running
your company as if it were accountable not just to in-
vestors but also to workers, customers, the commu-
nity, and ultimately the planet, which sustains us all.

A Quelstion of Culture
Amita~ Etzioni is visiting professor at the Harvard
Busines~ SchooL and University Professor at George
Washington university:
As scandals mount in the financial and commodities
markEts, economists theorize that the market deter-
mines one's ethicality. If "everybody" cheats, those
who don't will be wiped out. Like much economic
writing, this conclusion is not based on factual obser-
vatil)ns of ethical traders who went bankrupt but on
abs:ract theories about "perfect competition:'
University of Chicago sociologist Wayne Baker ob-
s~ved that many traders in the pits organize themsel-
"Yes in tightly-knit social groups that jealously guard
/ thei r pits. Often, they do not "hear" better bids
shouted by traders who visit from other pits. And they
juggle trades to exhaust the capital of those outsiders.
More generally, social scientists have found that social
ties and other such noneconom ic factors largely deter-
mine whether conduct is ethical. Leading these non-
economic factors are local cultures and the social
webs that sustain them.
For example, thl: culture of some pits is more toler-
ant of unethical conduct than the culture of others.
Federal Bureau of Investigation agents initially pene-
trated the Standard & Poor's 500 pit but found little
unethical behavior. The agents then moved into the
yen and Swiss franc pits, which reportedly have much
more ]::lX cultures.
Other differences in culture and regulatory tradi-
tions seem to exist among exchanges. In previous
years, many investors believed that the New York
Stock Exchange adhered to stricter standards than the
American Stock Exchange and the over-the-counter
market, which in turn were thought of as "cleaner"
than certain regional exchanges. (Denver's exchange,
for example, is frequently in the news as the hotbed of
often manipulated penny stocks.) Likewise, the Tokyo
and Mexico exchanges are believed to be much more
"rigged" than, say, the exchanges in London.
THE PROFIT SQUEEZE
Another economic theorem is that unethical behav-
ior rises in a profit squeeze. To survive trades, finan-
ciers and others are pushed, if not forced, to "cut
corners:' Or, as it is often put, eth ical behavior is a
"luxury" of those with hefty profit margins. Actually,
the implication that ethics is bad for business is sim-
plistic ..As the commoditiesJIl.drket :>Irp::lrlyrlic;rov-
~Prl unethical behavior tarnic;hp<;an industry's repu.;;
'-..t.a.ti.o.rLanddrives JllJt Cld"~l'; It is an effect that
lingers for years. Also, transaction costs are higher the
more unethical the market. The less that those who
7. Do Good Ethics Ensure Good Profits?
trade can trust one another, the greater is the need for
accountants, inspectors, lawyers, and regulatory agen-
cies. The current FBI commodity market investigation
was reportedly set off after a major agricu Itural com-
pany, Archer Daniels Midland, complained that the
cheating in commodities was hurting its business. We
tend to forget that the commodity exchanges not only
serve those tryi ng to make a fast buck but also smooth
out agriculture and exports.
Finally, any examination of the list of people
charged with insider trading suggests that they hardly
suffered from a profit squeeze. Most are multi mil-
lionares - the stretch limo crew. Unethical behavior
is in large part driven by lack of conscience, unbridled
greed, desire to "outperform" the other guy in a game
scored in millions of dollars. Others, on the way up,
become so accustomed to "cutting corners" and ac-
quire so much hubris in ducking the law that they fail
~~ But Not Forgotten
"Remember when all those corporations, bowing
to political pressure, pulled out of South Africa a few
years back? Turns out it's not so easy to make the
break.
"Barclays Bank's local interests were taken over by
South Africa's First National Bank in 1986. So why do
the prestigious blue-and-white Barclays signs still
grace hundreds of branches throughout South Africa?
'There's a timetable for taking the signs down,' sighs a
spokesman for Barclays, 'around 1990 I think.'
"Hertz also left South Africa last year, when its
licensing agreement with Imperial Cars of Johan-
nesburg expired in December. But Hertz's yellow-and-
black booths still greet you on arrival in the major
cities. 'I don't know what we can do,' says a clearly
shocked Hertz flack. 'It's up to our lawyers in
London.'
"Woolworth's has it even worse. Its familiar logo
beckons from stores in virtually every South African
city. Is Woolworth's still invested there?The growling
reply: 'We have never been in South Africa. We know
about the signs, but it's not us."
-Christie Brown in
Forbes
April 17, 1989
to change even after they reach the top. Moreover, in'
each trade and profession, and on all levels of in-
come, there are many who are basically honest.
Self-regulation is inadequate. Individuals who are
ethically concerned need to join with like-minded
others to participate in the difficult task of changing
unduly lax cultures. They will often lose business to
other markets if they do not shape up. They will al-
ways be less able to face thei r neighbors, community
and children, and, one hopes, their better self.
23
1. BEHAVIOR OF HOUSEHOLDS AND FIRMS
An Anthropological Answer
Lionel Tiger is professor of anthropology at Rutgers
University:
The date of emergence of full-fledged Homo sapi-
ens has been consistently pushed by anthropologists
farther back into time; now the estimate is 100,000
years ago. Before then, our species persisted as a
hunter-gatherer, with perhaps some scavenging, for a
million years or more. Our current incarnation as in-
dustrial man has existed too briefly for any significant
basic change in our nature to have been fixed geneti-
cally.
All this is to say we are a very conservative species,
one which has by and large lived in small groups of
perhaps twenty-five to 200 and in which full disclo-
sure was the norm in social affairs. Under these inti-
mate and direct circumstances, persons who were
moral, ethical, and acceptable to their fellow men and
women would be the most likely and indeed perhaps
the only individuals who would secure mates, suc-
cessfully reproduce, and assert their genetic nature.
Outlaws were ostracized, which in a cooperative so-
ciety essentially was a sentence of death. Since we are
stiII an elaborately gregarious and cooperative spe-
cies, we probably carry - in metaphorical terms - a
gene for morality. I think that is why populations at
large are so interested in good guys and bad guys,
courtroom dramas, retributive justice, and the expo-
sure of scandal and malefaction. The question is how
to tap this basic moral impulse, especially within the
large organization. Over the years, the cooperative
system has evaporated. The industrial world, which is
barely ten generations old, has produced no major
ethical system of its own to replace it.
In order to bring back the morality inherent in an-
cient, small-group interaction, we must adapt the
small unit of hunting-gathering to the industrial way. I
have made the suggestion that work organizations
. should try moral "quality circles" in which people in
an enterprise discuss not only how to improve pro-
ductive efficiency but how to improve moral integrity
and satisfaction. This is another way of approaching
the broad reality that people prefer to do what is pro-
social and what will earn them the ethical approval of
their peers. The moral quality circle is a means of in-
stitutionalizing this element of human nature and or-
chestrating it with the general purposes of the
enterprise. Without that kind of inculcation of values,
ethi.cs and profit will often conflict within the mind of
individual workers.
'Plainly, if the enterprise in question is devoted
solely to seqJring profits, the moral quality circle may
well perfor~ a "spoiler" function by inhibiting what
may be the' most profitable cou rse of action, in the
short run at least, should this action violate the collec-
24
tive ethics of -the group. However, over the longel- run
the calcu lation may well be marked Iy different, as the
moral commitment of employees is directly relevant
to morale which is in turn generally positively related
to productivity. If this assertion seems to violate long-
held concepts about the primacy of self-interest,~o be
it. There has recently been much evidence of the in-
ad~quacy of straight rational interest theory to explain
human behavior. A more synthetic approach, which
encompasses the gregarious, socially sensitive capaci-
ties of human beings, is beginning to take hold. In
classical terms, Adam Smith's Theory of Moral Senti-
ments may more adequately reflect our evolutionary
legacy than his more famous assertions about the
communal value of individual self-interestedness.
And the fragility of pure self-interestedness is in-
creased in high-information, high-analysis communi-
ties in which devices such as corporate veils, secrecy,
and collusion become unreliable because of the scale
on which they must operate ann the number of will-
ing but free individuals they involve. Thus, a coopera-
tive system in which ethics and profits go hand in
hand is not only possible but most likely desirable.
The Market Is Moral
Ernest W. Lefever is the founder and president bf
Washington-based Ethics and Public Policy Center:
According to the Judeo-Christian ethic, the good so-
ciety provides freedom, justice, and an opportunity
for all citizens to meet their basic needs and to de-
velop their God-given talents. Such a society must
produce sufficient goods and services to support this
quality of life.
While no society is perfect, America has created a
highly productive economy which provides great op-
portunity and enables persons to pursue widely var-
ied material, cultural, and intellectual interests. This
achievement would not nave been possible were it
A Sour Note
"Symphony orchestras are the last, and perhaps
first, bastion of truly color-blind hiring. Musicians
audition from behind a screen. Dissatisfied with the
results, Michigan lawmakers tell the Detroit sym-
phony to hire blacks or face defunding. 'It's impos-
sible for me to go to Detroit because of the
atmosphere,' saysJames DePriest, a black conductor
who turned down a job there. 'People mean well, but
you fight for years to make race irrelevant, and now
they are making race the issue.' "
-Reason
June 1989

not for democratic capitalism supported by a remark-
ably free market system. And democratic capitalism
would not be possible without the profit motive.
Paul Johnson, a former British socialist and a highly
respected historian and political phil()sopher, has
given a succinct and spirited defense of contetQE0rary
capitalism. "Judged simply by its capacity to create
wealth and distribute it;' capitalism may be "the great-
est single blessing ever bestowed on humanity." John-
son overstates the case for effect, but he poi nts to a
fundamental fact. The countries with capitalist econo-
mies fueled by a vigorous profit motive are the most
productive the world has ever seen. Some preachers
academts assert
and harmful.~rue, that
there the profit motive
is self-interest is selfish
in the desire to
make money, but as Adam Smith pointed out, self-
interest in an open society can and usually does serve
the common good. Monopoly is the real enemy of the
consumer. Greed is not. Monopoly permits greed,
limits competition, and hurts the consumer, whereas a
profit-fueled market encourages enterprise and curbs
inordinate greedJHigh prices and shoddy goods are
driven out by lower prices and quality products. The
market is an exquisitely sensitive mechanism not only
for regulating supply and demand but also for facilitat-
ing distribution.
Instead of condemning business corporations as
evil, profit-hungry exploiters, as some religious lead-
ers do, they should seek to understand the great con-
tribution that corporations have made and are making
to the quality of life in the United States and to eco-
nomic development in the Third World. By and large,
the interests, ethics, and operations of American busi-
ness have quite naturally served the common good.
Conflict between profit and the common good is re-
solved in the system. It is true that a profit-driven mar-
ket is a necessary but not sufficient foundation for a
good society. As Adam Smith has also said, a people
must be motivated by "moral sentiments;' a sense of
what is good, and a respect for the rights of all if soci-
ety is to achieve the quality of life we truly desire. But
the unfettered capital ist system is certain Iy the best
and most logical way to reach this high plateau.
Life Isn't Fair
Robert C. Solomon is Quincy Lee Centennial Pro-
fessor of Philosophy and Business at the University of
Texas at Austin:
Professor Vogel suggests that the "relationship be-
tween ethics and profits is a rather tenuous one;' as
tenuous as that between financial success and invest-
ing heavily in R&D or having excellent labor rela-
tions. I would like to think, however, that investing in
research and having first-rate loyal employees would
7. Do Good Ethics Ensure Good Profits?
be about as close as one can come to assuring finan-
cial success. The problem seems to be that Professor
Vogel, like so many other skeptics in and around the
field of business ethics, wants something like a guar-
antee, the practical if not logical assurance that ethics
is a "prerequisite" to profits.
This is clearly impossible.(fhe rflationship between
ethics and profits is clearly not one of logical or finan-
cial certainty. Life isn't always fair, and neither is the
marketJBut more profoundly, Vogel's comments un-
derscore a common misunderstanding. The purpose
of ethics is not to serve profits; nor should we expect
that the market wi II reward fai r play.
Every discipline has its own self-glorifying vocabu-
lary Politicians bask in the concepts of "public serv-
ice" while they pursue personal power, lawyers
defend our "rights" on a handsome contingency ba-
sis, and professors describe what they do in the noble
language of "truth and knowledge" while they spend
most of their time and energy on campus politics. But
in the case of business, the self-glorifying language is
iron ically unflatteri ng. For example, executives stiII
talk about what they do in terms of "the profit mo-
tive;' not realizing that the phrase was invented by the
last century's socialists as an attack on business and its
narrow-minded pursuit of the dollar, the mark, and the
pound to the exclusion of all other considerations and
obi igations. /
o To be sure, a business does aim to make a profit, but
it does so by supplying quality goods and services, by
providing jobs, and by "fitting" in the community. To
single out profits rather than productivity or public
service as the central aim of business activity is just ask-
ing for trouble. Moreover, profits are not as such the ul-
timate goal of business activity. Profits get distributed
and reinvested~Profits are a means to building the busi-
ness and rewarding employees, executives, and inves-
tors. For some, profits may be the only means of
"keeping score;' but even in those degenerate cases, it
is probably the status and satisfaction of "winning" that
is the goal, not profits as such. r-
It was for a good reason that Aristotle scorned the
notion of profit tor its own sake, and even Adam
Smith was clear that it was prosperity, not profits, that
constituted the goal of the free market system
(whether or not the individual businessman thought
of this at the time). And prosperity is a big part of what
ethics is all about.
( The point, simply put, is that ethics has to do with
ends while profit is a mere means to those ends. To
suggest that the former serves the latter, rather than the
other way around, involves a deep and perhaps tragic
misunderstanding of both the purposes of business
and the importance of ethics. The market does not re-
ward ethics, or even general excellence, in such a di-
 1. BEHAVIOR OF HOUSEHOLDS AND FIRMS
rect, logical way. This is neither the purpose of the
market liar the reason for ethical business.
Enlightened Earnings
Jerome L. Dodson is president of the Parnassus
( Fund:
I
As strange as it may seem, I agree with both the poll
and Professor Vogel~ I think that a business enterprise
does, in fact, strengthen its competitive position by
maintaining high ethical standards. For example, a
company with a sound environmental protection pol-
icy is unlikely to be sued for damages or fined by the
Environmental Protection Agency. A company with
good employee relations is likely to have more inter-
nal harmony and, hence, a more productive work
force.(;enerally speaking, a company with enlight-
ened and progressive management in the social sense
is also one with enlightened and progressive manage-
ment in the business sense)
At the same time, an "ethical" or "responsible" pat-
tern of behavior is no guarantee of profits. If a com-
pany makes bad marketing or financial decisions, it
will fail just as fast as an "unethical" company. Al-
though I think that Professor Vogel may be somewhat
underestimating the financial benefits of responsible
behavior, he's right on target when he says that "ethics
are certainly not a barrier to financial success, but nei-
ther are they a prerequisite to it:'
A Slave to the Bottom line
Milton Moskowitz is a senior editor of Business and
Society Review:
David Vogel is surely correct in stating that the good
guys don't always win. There are examples galore of
marketplace winners who skirt the edges of moral be-
havior and treat their employees shoddily and their
Divine Justice
"The most celebrated building found to suffer
from toxic indoor pollution, the so-called 'sick
building' syndrome: the offices of the Environmen-
tal Protection Agency in Southwest Washington:'
-Regardie's
customers with contempt. Why else have we needed
labor unions, muckrakers, trustbusters, and consumer
advocates like Ralph Nader?
And yet it :s foolhardy to ignore the comeuppance
that unsavory characters and corporations frequently
experience over the long term. The resentment they
breed inevitably leads to marketplace defeats, in one
26
form or another. So there is an argument that can be
mounted which identifies social irresponsibility as a
causal factor in a company's downfall.
The difficulty comes when well-meaning people try
to establish a one-to-one relationship between suc-
cess and "ethical" or "socially responsible" conduct.
In a way, it's self-defeating to do this because it ac-
cepts in toto the dictum that the verdict of the market
is always right - and that socially responsible behav-
ior can then be justified because it leads to filthy lu-
cre. Why are people so uncomfortable in just saying
that being ethical is good in itself, that it makes the
person feel good and, by extension, the company? If
one has to justify a sense of responsibility by results at
ti
the bottom line, the whole concept of ethics or moral
behavior is a perversion. Ethical conduct does not re- fo
quire such justification. at
I
Paying the Price
Robert E. Frederick and W. Michael Hoffman teach
at the Center for Business Ethics, Bentley College,
Waltham; Massachusetts:
Everyone these days from corporate executives to
business ethics scholars and consultants is preaching
that good ethics is good business. This idea is being
used as the sole rationale for connecting business and
ethics. For example, in the Business Roundtable's m
I
1988 report Corporate Ethics: A Prime Business Asset, et
it is claimed that "corporate ethics is a strategic key to p
I
survival and profitability in this era of fierce competi- P
tiveness in a global economy." It sounds like business a
ethics is being marketed as the newest cure for what
ails corporate America: In fact, Edward L. Hennessy,
CEO of Allied-Signal, proclaimed ethics as "vital" to
the success of any business. "Indeed;' he states, "it is
essential to economic freedom."
In most cases we think thilt good ethics is good busi-
ness, especially in the long run. And we are certainly
encouraged that business leaders are beginning to
emphasize the importance of ethics in the market-
place. But regardless of whether ethics is essential for
business success, it should not be advanced as the
reason for doing business ethically.
The ethical thing to do will not always be in th~ best
economic interests of the firm; being ethical may on
occasion require that we place the interests of others
ahead of or at least on a par with our own interests. So
what happens when good ethics is not good business
- at least "good business" in the sense of "successful
business"? What happens when ethics conflicts with
the firm's economic interests? We believe that any eth-
ics program in business which has not faced up to this
possibility is doomed to fail. When the ethical crunch
comes, when a firm's duty conflicts with its economic
 7. Do Good Ethics Ensure Good Profits?
self-interest, the very rationale for the program itself Opposition to nuclear utilities is a good example
will be undercut.
of profit through ethics. Early environmental concerns
turned out to be precursors of more general market-
good ethics is good business but because we are spir- based concerns. Now it is generally perceived that
itually re.quired. to adopt the moral point of view in all nuclear based utilities are not as good an investment
} ourWedealings
should With other people
promote business - ethics
and business is no
not because as nonnuclear utilities,
Our original prospe'ctus talked about cogenera-
ors, we must be prepared to pay the costs of ethical tion and natural gas from coal seams, waste to energy,
behavior. The costs may sometimes seem high, but insulation, photovoltaics, fluidized bed burning, fuel
that is the risk we take in valuing and preserving our cells, etc. At the time, such environmental and alter-
integrity.
(eXception. In business, as in all other human endeav- native energy-directed investments seemed "far ouf'
Alternative Energies Now some of them are quite popular with Wall Street.
We still have hope for the others. For example, in
Maurice l. Shoenwald is president of New Alterna- 1982 we thought that tapping coal seams and mines
tives Fund, Inc.:
for natural gas would be a good investment, reducing
In contrast to Professor Vogel's assertions, I have
dependence on foreign oil and producing a cleaner
found a social conscience to be a great business asset,
burning hydrocarbon. In 1989 it is a popular technol-
at least in the investment arena. Of course, there are
ogy.
successful investors who are not influenced by con-
A clearer example that those with a socially re-
sponsible point of view may produce a self-fulfilling
den of proving that you cannot succeed without such
prophesy relates to investments in South Africa. We
motivation, but I do offer the proposition that ethical
declined such investments early on. With the passage
investing may
siderations enhance
of ethical your likelihood
investing. of investing
I cannot carry the bur-?
of time the larger part of the investment community
success. I submit that those who preach for ethical in-
seems to share this view. Who today is seeking out a
vesting are often the forecasters of community
South African investment?
change, and thei r proposals have a propensity to be-
We have avoided atom bombs and star wars. This
come self-fu lfi II ing:
limitation on our investment program has not done
Most corporate officers like good press and seek
much for us so far. But there is currently a slight "dan-
the purchase of company shares by the public. They
ger" that peace wi II break out. If so, bom b and star
may address social issues either because of thei r own
war stocks will not produce a premium. We have no
ethical sense or because it produces investor partici-
exposure to the investment dangers of peace. At least
pation. Socially, investors can have an impact on cor-
our stance is cautious or conservative with respect to
porate planning by making a sound corporate culture
such risks.
a prerequisite to investment. Thus a direct link be-
We believe that the companies that we invest in will
tween ethics and profits is forged.
be more and more influenced by the likes of us. Even-
A Mini-Migration tually companies that show community concern will
receive greater support from an ethical section of the
Nearly 30 percent of all children in the United market and their shares will perform better because of
States live in three states. The rankings: it.
California 12.6
Texas 8.2
ented businesses will tend to be quite profitable in the
New York 6.8 years to come. As more and more people demand eth-
-Census Bureau icalAllbehavior,
moral arguments aside, increasingly
it will become I think that important
socially ori-~
to
the generation of profit.

27