[back to archive]
P H I L O S O P H Y F O R B U S I N E S S ISSN 2043-0736
http://klempner.freeshell.org/businesspathways/
Issue number 1
2nd November 2003
CONTENTS
I. 'The Ethics of Tax Avoidance' by John Sartoris
II. 'A Brief on Business Ethics' by Tibor R. Machan
III. 'Business Ethics and the Ethics of Business' by Dale Barrett
-=-
EDITOR'S NOTE
Welcome to Philosophy for Business.
I hope that you will find today's offerings stimulating and provocative.
If you would like to contribute an article, or respond to any of the articles
published here, please e-mail klempner@fastmail.net .
Enjoy your reading!
Geoffrey Klempner
-=-
I. 'THE ETHICS OF TAX AVOIDANCE' BY JOHN SARTORIS
'Every man is entitled if he can to order his affairs so that the tax attaching
thereto is less than it otherwise would be'. This now somewhat infamous dictum
of Lord Tomlin's in the 1935 House of Lords' decision in the Duke of
Westminster's case has, ever since, been the mantra of the UK tax avoidance
industry.
The theory is that you can do whatever you want as far as reducing your tax
bill is concerned as long as what you do is not dishonest or specifically
prohibited by law and thereby strays over the line into tax evasion, rather
than avoidance.
How does the Westminster principle -- if it can be called such -- stand up to
21st century concepts of business ethics and such modern notions as Corporate
Social Responsibility?
Avoidance and evasion
Let's try to be clear first about this distinction between tax evasion and tax
avoidance. Conceptually, it is nothing more than the difference between honesty
and dishonesty in dealings between the taxpayer and the Inland Revenue. Ruled
out are not only omission and inaccuracy, but also misleading statements and
concealment of relevant facts. You cannot use the excuse: 'Well, if the
inspector doesn't know about it, it's up to him to find out. Why should I tell
him first?' If there isn't full and accurate disclosure, it is tax evasion, not
avoidance.
Some examples might help to clarify the distinction. It is illegal tax evasion
not to declare interest income from your offshore bank account; but acceptable
tax avoidance if you put the same money into an ISA or TESSA, even though the
amount of interest you receive is the same. That is an obvious case where the
there is a specific statutory exemption from taxation that is relatively clear
in its operation. Many would not even see it as tax avoidance at all. But it is
under the Duke of Westminster definition: 'ordering one's affairs so that the
tax attaching thereto is less than it otherwise would be'.
Not all cases are so obvious. What about the husband who transfers his
half-interest in the matrimonial home to a trust so that his estate is reduced
for Inheritance Tax purposes but his wife's is not increased with the
consequence that the children eventually benefit twice from the nil rate band
on the wife's death? Or, again, the husband who transfers shares to his wife
before they are sold so that both his and his wife's annual exemptions can be
utilised to reduce the taxable gain? Most tax professionals would probably
regard such strategies as these as acceptable -- even required -- tax planning.
But, again, under the Duke of Westminster principle, they are tax avoidance.
And what about multinational corporations and the ultra-complex and
ultra-sophisticated arrangements they put in place to reduce their tax bills?
Can arrangements that employ such artifices as hybrid (or reverse hybrid) legal
entities or Luxembourg Holding companies with finance branches in the
Netherlands to manufacture tax savings out of different countries different tax
treatments of the same transactions be regarded as just tax avoidance or is it
really evasion?
Acceptable and unacceptable avoidance
The lack of agreement in distinguishing cases of tax avoidance from cases of
evasion has resulted in a blurring of the distinction between them based on the
strict criterion of honesty. The term 'tax avoision' has come to be used to
refer to those practices the speaker regards, not as dishonest evasion but,
even so, as unacceptable tax avoidance. Since dishonesty is not the criterion,
avoision can include arrangements that are honest and would therefore be
acceptable under the Duke of Westminster principle as being no more than
'ordering ones affairs so that the tax attaching thereto is less than it
otherwise would have been'. The question is then how to distinguish acceptable
tax avoidance from avoision or unacceptable avoidance?
The law, in the UK at least, has been unable to provide clear and consistent
jurisprudence to decide that question. Lord Tomlin's dictum was generally
respected by the Courts for about 50 years after the Duke of Westminster's
case. But, from the early 1980's, a number of Law Lords found themselves able
to depart from it by invoking a new principle to the effect that the legal form
of certain artificial tax avoidance schemes could be ignored if they lacked
commercial substance -- in particular, if they involved a series of circular
transactions. This so-called 'Ramsay' principle enabled the Courts to condemn
such schemes as unacceptable tax avoidance and to hold that they were invalid
and did not achieve the tax savings intended.
For a time, it appeared that this new juridical approach had sounded the death
knell of the tax avoidance industry. But, as a number of countervailing
judgements starting in the late 1990's subsequently proved, it was suspension,
rather than death. The new approach eventually turned out to be no more than
the expression by a rather high-minded coterie of senior judges of the time of
their personal social and political inclinations, rather than the establishment
of an enduring legal principle.
A role for ethics?
If the law cannot provide a sound basis for distinguishing acceptable tax
planning from unacceptable tax avoidance, can ethical considerations assist?
Certainly, many have thought, or at least claimed so. The tax avoidance
practices of multinational corporations in particular are nowadays continually
assailed as 'immoral' or 'unethical' by anti-globalisers, Greens and many
others mainly on the left of the political spectrum.
Sometimes their claims seem to amount to no more than the assertion that, if it
is done by a multinational, then it must be wrong. But more reasoned charges are
also made. For example, it is claimed that tax avoidance is unethical on
utilitarian grounds because it damages the general economy and therefore does
nothing to increase the 'greatest happiness of the greatest number'.
The trouble with this claim lies not so much in the appeal to the ethical
principle but more in the difficulty of establishing the factual premise that
tax avoidance produces more harm than good. There is a strongly arguable case
that economies prosper where there is less, rather than more, taxation. And,
since prosperous economies can be held to produce more happiness than less
successful ones, it can be argued that avoidance, through reducing the tax
burden on the general economy, produces more prosperity and happiness and is
therefore actually ethical on utilitarian principles, rather than unethical.
Another claim is that tax avoidance is immoral because it is unfair in the
sense that, if one man avoids his taxes, it only transfers the burden on to
others who have to pay what he has avoided. Again, the trouble is not with the
ethical basis of the claim, vague as the simple appeal to 'fairness'
indisputably is. It is the premise that is faulty. What the claim overlooks is
that tax rates are set by politicians.
It is natural for politicians to always set tax rates at the highest level they
think voters will bear. So, even if they could eliminate tax avoidance
altogether and thereby increase the total tax take substantially, the
politicians would know that that the generality of taxpayers would still bear
the tax rates they had previously set. They would therefore not reduce those
rates to pass on the benefit of the increased tax take 'fairly' to other
taxpayers. Instead, they would simply find more essential services to spend the
extra taxes on.
That is just acknowledgement of the fact that, in the field of taxation, a
version of Parkinson's Law applies to the effect that 'public expenditure
always expands to absorb any level of taxation that governments can raise'. And
it explains why the fairness argument doesn't work. Avoidance does not unfairly
transfer the tax burden to non-avoiders because the burden on payers remains
the same irrespective of how much tax is or is not lost to avoiders.
Then there is the appeal to fashionable ethical notions such as Corporate
Social Responsibility (CSR). The basis of CSR thinking is that the shareholders
are not the only stakeholders in the company. Employees, suppliers of goods and
services and customers also have stakes in the forms of the salaries and wages
they earn and the prices charged to and by the company. The State is also held
to be a stakeholder and, represented by the Inland Revenue, has its entitlement
to a share of the profits in the form of taxation.
The claim is then made that tax avoidance, in the Duke of Westminster
minimisation sense, is inconsistent with the ethical obligations companies have
to the Inland Revenue under CSR. But this charge is actually incoherent. Nobody
suggests that companies should pay shareholders, employees or suppliers more
than they have to. So why should not the same restriction apply to tax
payments? For consistency it must. The Inland Revenue may be a stakeholder but
it is, at best, an equal, not a preferred, stakeholder. That leads to the
conclusion that, far from being there being any inconsistency, CSR actually
requires the application of the Duke of Westminster principle so that no more
tax is paid than is necessary. Without this restriction on tax payments, the
interests of the other stakeholders in the company would be unfairly prejudiced.
Utilitarian considerations such as those outlined above fail to identify a
satisfactory criterion for distinguishing acceptable from unacceptable tax
avoidance. They lose sight of that objective in their universal condemnation of
all avoidance as unethical. Most taxpayers would reject this as an extreme view
that would condemn as unacceptable such comparatively innocent transactions as
investing in an ISA.
But it is not enough just to accept that, as a practical matter, not all tax
avoidance can reasonably be held to be unacceptable. A more substantial and
rational basis is required to justify that ethical stance. Where can one look
for this?
The Libertarian view
The Libertarian school of philosophy has a long and distinguished history that
can be traced back at least as far as Enlightenment thinkers such as John
Locke, Thomas Paine and Adam Smith. It has found very powerful modern
expression in the works of economists such as F. A. Hayek and Milton Friedman
as well as the philosopher Robert Nozick. Its concerns are primarily political
and economic but, like all such philosophies, it has important ethical
implications as well.
Libertarianism holds that individuals have a fundamental right to own and keep
their own property, including the salaries, wages and profits that they
legitimately earn. It is accepted that taxes must be paid to the State for
essential services for the common good that could not otherwise be provided.
But the point Libertarianism insists on is that taxpayers must, through their
democratically elected institutions, give prior, voluntary consent to the State
taking away what primarily belongs to them.
This can be contrasted with socialist systems where it is held that at least
part of the wealth and income of the country belong to the State by right so
that, even without consent, the government may take and redistribute that
wealth and income in accordance with such formulas as 'from each according to
his ability, to each according to his needs'.
The United Kingdom is a property-owning, parliamentary democracy, even though
it also has a number of quasi-socialist institutions such as the health and
education services. For the most part, the income and wealth of the country are
in the hands of private individuals in the form of the salaries, wages and
profits they earn and their ownership of real estate and public and private
corporations (including indirect ownership through pension funds and savings in
unit and investment trusts etc).
This, of course, is not thoroughgoing Libertarianism, which could hardly be
expected given the traditional British suspicion of political ideologies.
Nonetheless, the Libertarian streak is still strong, especially in people's
attachments to home ownership, their pensions and savings and their right to
spend their own earnings as they wish.
The Libertarian ethic that supports the fundamental rights of individuals to
own private property and income and not to be deprived of them by way of
taxation without their prior consent has this result when applied to taxation.
First, and most importantly, it denies that the State has a general right to
tax or that it has a moral right to a 'fair share' of the wealth and income of
the nation. Rights such as those can only be justified under socialist systems.
In contrast, the Libertarian view is that the requirement for prior consent
restricts the State's right to tax so that it applies only to the circumstances
clearly and explicitly set out in the legislation specifically consented to.
Given that the State's right to tax is restricted in this way, it follows that,
if the taxpayer's circumstances change, the consent previously obtained no
longer applies. This is true even when the circumstances change by reason of
the taxpayer's own actions. The prior consent permits taxation only in the
limited circumstances specified in the relevant legislation. If the taxpayer
arranges matters so that his new situation is not covered by that legislation,
the tax can no longer be said to be due because prior consent has not been
given to taxation in the changed circumstances.
It is a hardly noticeable step from that conclusion to endorsing Lord Tomlin's
view as expressed in the Duke of Westminster's case back in 1935, that it is
acceptable avoidance for a taxpayer 'to order his affairs so that the taxation
attaching thereto is less than it otherwise would have been' where 'acceptable'
is understood as deriving its ethical import from within Libertarian philosophy.
This, in effect, is to deny that any useful distinction can be made between
acceptable and unacceptable tax avoidance. But that does not mean taxpayers
have unrestricted licence in tax matters. On the contrary, honesty -- in
particular, full and accurate disclosure in dealings with the Inland Revenue --
is always required; otherwise, it is not avoidance at all but illegal evasion.
(c) John Sartoris 2003
E-mail: sartoris@ntlworld.com
[The author is a professional tax consultant with over thirty years' experience
of advising individuals and public and private corporations on domestic and
international taxation.]
-=-
II. 'A BRIEF ON BUSINESS ETHICS' BY TIBOR R. MACHAN
1. The foundation of business ethics
Ethics is a discipline specializing in the examination of answers to the
questions "How should I act?" or "What standards ought I use to guide my
conduct?" This is not a trouble free discipline by any means -- many prominent
thinkers consider it bogus, as they might view astrology, mainly because they
deny the twin supports on which ethics rests, namely, that human beings can
make bona fide choices and that there can be some firm standard by which to
judge the choices they make.[1] "Ought" implies "can," which is to say that
acting on any answer to the question of ethics or any of its divisions,
including business ethics, assumes both that we have the freedom to choose how
we act, and certain standards for acting rightly versus wrongly.
Assuming, now, that ethics is a bona fide area of human concern, business
ethics is a division of professional ethics, specializing in focusing on the
special area of commerce and the profession of business. It seeks the right
answer to the question "How ought I to act in my capacity as a commercial agent
or professional merchant, manager, marketer, advertiser, executive and even
consumer?" Unlike the other major discipline that looks at business, namely,
economics, business ethics does not assume that there are innate motives
driving one to maximize profits or utilities or long term self-interest.
Business ethics, as any other look at human morality, takes it that we are all
capable of doing the right or the wrong thing and that we aren't naturally
inclined either way -- it's up to us which we will chose. That, too, is the
assumption underlying the criminal law in most societies.
Given the nature of ethics as such, it follows that if one's will is
tyrannized, regimented, regulated, etc., in the bulk of one's life, one cannot
act ethically because then one is not making the decisions as to how one will
act. To claim that a banker or employer or advertiser ought to do or avoid
doing such and such, is to claim that the individual is able to choose and that
some way of showing what he or she should or should not do is possible. Barring
that, all talk of ethics, including business ethics, is just lamentation, as
when one complains about bad or cheers good weather. This, indeed, also
explains why such institutions as slavery and serfdom are widely seen to be
assaults on human dignity, the capacity of persons to be morally responsible
agents.[2]
Liberty in human communities is secured mainly via the right to private
property. If one has no authority to dispose of one's assets as one sees fit,
one isn't in charge of one's life. If others do this, by government regulation
or planning, or by criminal intrusion, one cannot be responsible for one's
conduct at least to the extent one is being regimented. Paternalistic laws
treat one as a child may be treated, dependent on the decisions of others and
not fully responsible for how one acts.
A well guarded right to private property is, then, a prerequisite for the
exercise of virtuous conduct in any sphere but especially in commerce and
business. Thus, arguably, without a substantial measure of capitalism, there
cannot be any intelligible concern about business ethics, for people will lack
the choice-making capacity or opportunity that is a prerequisite of ethics.
2. Business ethics assumes commerce and business are, as a rule, morally proper.
Professions are valued human specializations. Medicine, law, education,
science, etc., are all professions that fulfill some good -- health, justice,
rearing of children, knowledge, etc.
Is there any such good that commerce strives to fulfill? Is there a moral
virtue that requires us to strive for such a good?
Yes, the virtue of prudence, which requires of us all to take reasonably good
care of ourselves in life, is such a moral virtue. The goal to be supported
includes prosperity, health, knowledge, and so forth. The effort to prosper, to
seek to profit, is part of what the moral virtue of prudence requires from us.
Commerce, for us all as amateurs, and business, the professional extension of
commerce, specialize in the production of prosperity. They are what I call an
institutionalization of certain dimensions of the virtue of prudence.
3. Why, however, is business ethics often business bashing or taming?
The virtue of prudence is seriously demoted when converted to the profit
motive, an innate drive to promote one's self-interest. In ancient Greek
philosophical ethics, as well as in other traditions of virtue ethics, prudence
was seen as living carefully, doing what one's good sense, practical reason,
would judge right. But this tradition fell on hard times, with the embrace by
modern philosophers such as Thomas Hobbes of a mechanistic explanation of human
behavior that hardly left room for ethics.[3]
Largely guided by the Hobbesian philosophical and methodological framework,
early economists began their study by embracing the capitalist system without
any kind of moral defense of it -- it would have seemed odd to champion a
virtue of prudence at the time, given the modern scientism[4] that prevailed
among many prominent thinkers. Instead, they tended to defend capitalism for
its hospitality to the innate, unavoidable human drive to seek profit.
Capitalism was to be the smooth path, with minimum friction, to
self-satisfaction the sum of the achievement of which was to be the public good
or general welfare.
Since economists, as social scientists who strive to follow the methods of the
natural sciences, have avoided the moral issues, the critics of capitalism have
cornered the market on morality. Today we see the result -- if we speak of
morality, we tend to think of actions that are altruistic and thus business is
left out of the morally praiseworthy professions (in contrast to education,
art, science).
4. This is a mistake that rests on several mistakes.
In fact, however, people aren't driven to act prudently -- we have ample
evidence of imprudence in human affairs. Doing what is prudent requires a
choice -- and determination or commitment. Indeed, embarking on commerce is a
matter of choice and the critics know this but disapprove.
Caring for oneself -- not just about what one desires or prefers -- is a
prerequisite for caring for what constitutes the important elements of one's
life -- family, friends, community, country or humanity itself. One part of
this is being economical in the way one lives, doing commerce and business
wisely, diligently, conscientiously.[5] Indeed, it means, in part, heeding the
bottom line, to put it the way that critics so disparagingly do.
What our commercial and business conduct needs is serious concern for doing it
decently, properly. This involves education, not bashing and taming, as if such
conduct were something innately wild and vicious. It is a prejudice to so view
commerce, a prejudice that has encouraged some of the most horrible forms of
human community life, fascism, socialism (both national and international), and
communism, all of which deride business and the striving for profit, as do some
religions for obvious reasons.[6] They are false ideals and, for business (and
indeed other aspects of earthly life) to flourish, they must be abandoned in
favor of a bona fide ethics -- including business ethics -- that teaches
prudence and other virtues, such as honesty, integrity, industry,
entrepreneurship and general respect for individual rights.
5. Some objections considered
A moral philosopher could well respond to the above by asking whether, in fact,
prudence is a moral virtue at all. Philosophically informed readers may be
thinking of Thomas Nagel's book 'The Possibility of Altruism' which contrasts
morally motivated action with prudence defined as acting in the interests of
one's own future self.[7] In the present discussion, however, a richer notion
of "prudence" than Nagel's stripped-down version is being deployed.
As already hinted, in the modern moral philosophical era prudence became not a
virtue but an impulse, drive or instinct, following Hobbes' theory of human
motivation that emerged from taking the classical physical model of how things
move in nature. The drive for self-preservation or self-aggrandizement in
humans is but the manifestation of the law of motion concerning momentum.
As far as its impact on moral philosophy is concerned, the Hobbesian and later
social scientific account basically leaves room for a much truncated moral
life. Indeed, the idea that a person can choose to act in various ways, some
(objectively) right, many quite wrong, drops out of Hobbes' deterministic
picture, as it does out of B. F. Skinner's, the 20th century behaviorist's.[8]
The Hobbesian picture, with some nuances added, became the basic framework for
the classical economists' idea of why people acted (behaved) as they did --
they were driven to maximize utility. David Hume and Adam Smith did pretty up
this notion with talk of natural sympathy and such but it remained for Immanuel
Kant to revitalize a bona fide moral point of view but at considerable cost.
In Kant prudence remains this impulse or drive but balanced by the notion that
one may be able to overcome it via the good will, which has noumenal origins --
ergo Nagel's and many others' (e.g., Kurt Baier) pitting of morality against
prudence (with the latter's ambivalent standing).
In my understanding of business ethics, and indeed ethics as such, I turn to
the Aristotelian virtue ethics tradition wherein prudence is practical reason,
the moral virtue of choosing to be careful and to avoid wastefulness,
recklessness, thoughtlessness and other forms of neglect toward one's
flourishing in life.
None of this bails out corruption or charlatanism in business any more than
acknowledging the value of the health care professions bails out quackery and
malpractice. What it does do, however, is to identify the profession of
business and commercial activities in general as morally well founded, decent
endeavors. It rescues business ethics from its frequent characterization as an
oxymoron.
---
ENDNOTES
1. For more on this see Tibor R. Machan, "A Brief Essay on Free Will," in John
Burr and Milton Goldinger, eds., 'Philosophy and Contemporary Issues'
(Englewood Cliffs, NJ: Prentice-Hall, 2003). For a fuller discussion of
business ethics itself, see Tibor R. Machan & James E. Chesher, 'A Primer on
Business Ethics' (Lanham, MD: Rowman & Littlefield, 2002).
2. To avoid misunderstanding, this doesn't mean no one under duress has any
moral responsibilities, only that with increasing duress the capacity to
fulfill them diminishes. For more on this, see Tibor R. Machan, 'Generosity;
Virtue in Civil Society' (Washington, DC: Cato Institute, 1998).
3. For more on this, see John C. Moorehouse, "The Mechanistic Foundations of
Economic Analysis," 'Reason Papers', No. 4 (1978).
4. This is the idea that the methods and assumptions of the natural sciences
ought to be implemented and embraced by all others studies, including
sociology, economics, and politics. See, Tom Sorell, 'Scientism: Philosophy and
the Infatuation With Science' (London: Routledge, Ltd., 1991).
5. I have proposed to call this wealth care, to parallel what is widely taken
to be the perfectly legitimate concern dubbed health care.
6. Commerce tends to divert attention from otherworldly concerns that religions
want us to focus on. For more on this, see James E. Chesher and Tibor R. Machan,
'The Business of Commerce, Examining on Honorable Profession' (Stanford, CA:
Hoover Institution Press, 1999).
7. Thomas Nagel, 'The Possibility of Altruism' (Oxford, UK: Clarendon Press,
1970).
8. There are others, so called soft-determinists, who make room for a peculiar
version of morality. For example, there is Daniel Dennett, 'Elbow Room'
(Oxford, UK: Clarendon Press, 1984), who tries to construct a moral framework
within the boundaries of scientific determinism but the idea of personal
responsibility for having made a wrong choice that one could have avoided
making is effectively lost in this outlook.
(c) Tibor R. Machan 2003
E-mail: Tibor_R._Machan@link.freedom.com
-=-
III. 'BUSINESS ETHICS AND THE ETHICS OF BUSINESS' BY DALE BARRETT
In 1981 Peter Drucker's statement that "business ethics" doesn't exist was
ignored. Today the bastions of capitalism -- Enron, WorldCom, Global Crossing
-- crumble under the onslaught of public wrath and legal retribution proving,
in large measure, Drucker's criticism. If business ethics as an accepted
business principle doesn't exist, then why?
One reason, ethics in business lacks grounding is because there is no
universally and consistently accepted definition. Ethics, in general, refer to
reasonable obligatory standards of right or wrong (rape, murder, assault...etc)
that curtail individual behavior and potentially carry grave penalties.
Universally accepted and enforced each penalty delivers a measured retributive
ruling. The perpetrator's self-interests are restricted -- economically and
socially. However, business ethics lacks equitable standards and broad coercive
consensus.
Conducting ethical activities in business is not the same as following the law.
The law often integrates ethical standards to which most rational thinking
citizens subscribe. But laws, like feelings, wander and waver from what is
ethical. The U.S's own pre-Civil War slavery laws and those of apartheid South
Africa are obvious examples of unethical laws. Throughout the apartheid era
European and American companies profited handsomely. Riding the wave of
anti-communist public opinion, opportunistic European and American politicians
championed the cause of trading with any enemy of communism, defending their
actions (self-interests) as crucial in halting communist expansion. Such
business acts were legal, yet unethical. Arresting communist expansion,
apparently, held the moral high ground. Therefore, trading for gold, diamonds,
uranium, and specialized raw materials used in the automotive industry, space
and military programs with a racist and brutal regime was deemed valid.
In short, economic self-interest made a mockery of ethics, as the president of
the United States down to the person on the street allowed predatory capitalism
(unethical capitalism) to devour their principles. A "universal" and
consistently applied set of ethics (the Sullivan Principles) ushered in a
business moral code, but only after the inhumane treatment of people could no
longer be justified in pursuit of profit and politics.
While most businesses act under some ethical code evidence of a formalized and
consistent framework is absent. Furthermore, the definition of ethics in the
U.S. is not likely to mirror the understanding of ethics in, say, Argentina, or
Zimbabwe. Evidently, there is no universal ethical DNA map, only quasi-ethical
DNA markers -- country/ region specific business/ trading laws. Generally,
business laws are seen as sufficient in restricting "unethical" activities.
Ethics in business, therefore, is at best a haphazard compliance by a few
endeavors to "run a clean show" or because a formula has been developed which
serves the company's self-interests, both monetarily and socially, for example,
The Body Shop.
Probably the primary reason business ethics lacks broad consensus is because
corporate decision makers' focus on profit optimization, not principles, the
bedrock of capitalism. Hence, the principal function of business is about
profits and shareholder wealth. That is to say, ethics serves no measurable
purpose when businesses view national and international business statutes as
their only 'ethic', imposed through the coercive power of the state or
International Trade courts.
Ethics, like any other business component, is weighed on merit. For example,
what is the cost/ benefit ratio? Will it give me competitive advantage? Is
there a first mover advantage? Does it ensure sustainability? How will it
impact my strategic value? What, if any, is the customer value? And, probably
the most pivotal of questions: Does embracing ethics help or hinder my
self-interests or the self-interests of the company? Ethical Investment
Research Service (EIRIS), in the UK, claims measurable gains and lower
investment risk factors are possible.
On the other hand, human resources, R&D, marketing, advertising, operations,
and finance activities consistently produce measurable costs and benefits when
examined using scientific business models. Ethics, however, has failed to
attain similar validity. In fact, on the contrary, money, and boatloads of it,
has been made excluding ethics as a business function. It only becomes
measurable when a company's unethical practices are brought to light and
millions or billions of dollars lost.
In fact, dominating "corporate-speak" are issues on product innovation,
strategic advantage, IPOs, hostile takeovers, growing market share, and
valuations in acquisitions...etc. Corporate gatherings for sundowners, lavish
meals, expensive retreats, and other Romanesque activities of capitalistic
gluttony purposely ignore conversations that hamper their profit orgy
indulgences. The Caesars and Emperors of Enron, Bridgestone/ Firestone, the
Ford Motor Company, and others delight as their profit empires send legions of
profit gathering mercenaries to slash and burn, laying waste to opposition
while covertly employing every conceivable tactic to optimize profit and
shareholder wealth. Why? In part, the answer lies with capitalism's obsession
with profit such that ALL resources are seen as sacrificial "resource-virgins"
at the Dionysian alter of corporate and government greed.
Closely allied to profit optimization, and in conjunction with, are two pivotal
concepts: the market and self-interest. From an economic standpoint conventional
business wisdom dictates that the market, like a gyroscope, keeps the business
jet (no pun intended) flying straight and true. Therefore, anything "...that
interferes with the market: government, public attitudes, or cultural values,
for example; by definition create[s] economic inefficiency [drag] and is bad
for society," says John Ikerd from the University of Missouri. Economic
inefficiency is created, as viewed by business, when anything, ethics included,
increases friction. Business, since Adam Smith, has steadily improved
efficiencies through operations, marketing, management information systems,
finance, and engineering. Conspicuously absent is a business ethic. Why? One
answer is business efficiency has improved geometrically offering humanity
astounding advances in medicine, communications, biotechnology, and overall
improvements in conveniences and life in general. Business ethics is not
integral to market efficiency. If it were, then, surely, its contribution would
have been significant if not at least seriously considered.
Adam Smith, the father of conventional economic theory, in his book, 'The
Wealth of Nations', first postulated the sanctity of the market idea. "It is
not from the benevolence (replace with ethics) of the butcher, the brewer, or
the baker, that we expect our dinner, but from their regard to their own [self]
interest. We address ourselves, not to their humanity (ethics) but to their
self-love, and never talk to them of our necessities but of their advantages"
(p. 7). Later, in reference to trade, Smith states, "he intends only his own
gain, and he is in this, as in many other cases, led by an invisible hand to
promote an end which was no part of his intention." "By pursuing his own
interest he frequently promotes that of society more effectually (sic) than
when he intends to promote it" (p. 199). "These statements provide the
foundation of contemporary economic wisdom -- that pursuit of short run
self-interests is transformed into achievement of the public good, as if by an
invisible hand. The greatest societal good results from the greatest individual
greed."
If societies' good is the product of self-interests as postulated by Adam Smith
then greater good must result from a more concentrated self-interest, that is to
say, predatory capitalism.
Smith's "greatest individual greed (self-interest)" is especially advantageous
for democratic systems as it encourages greed under the guise of euphemisms:
"free market," "a free market will free us all," unfettered competition,"
freedom and democracy -- translation: money, power, and greed. When the primary
issue or focus of capitalism is benefit or self-interest, says Deroy Murdock, a
columnist with the Scripps Howard News Service, little stands to effectively
challenge such powerful motivators and drivers for profit. Ethical seeds will
drown in such a predatory capitalistic swampland.
Evidence of progress and wealth achieved by industrialized nations in the
absence of formalized business ethics is weighty. What forces might persuade
actors to embrace business ethics? Academicians and business consultants
proffer the notion that ethics should begin with the individual employee and
manager. Even well meaning and principled individuals are slaves to the market
and self-interests. Capitalist theology, their pillars of self-interest, market
efficiency, "creative destruction", "unfettered competition"...etc are
sacrosanct. The US Constitution, the bedrock of American democracy, while
speaking eloquently and forcibly about the rights of the individual suddenly
has little to say when confronted with supporting the rights of the individual
over that of a corporation. The self-interests of businesses and business law
in the US are such that "when American workers go to work they lose almost all
of their personal [freedoms and] privacy," says Charles J. Sykes, a research
fellow at the Hoover Institution in Palto Alto, California. Such an embedded
algorithm encourages exploitation because few people are willing to take on the
power establishment of corporations. Thus, companies' activities are fully
engaged on the basis that predatory capitalism (unrestrained self-interests)
ensures power, money, and corporate imperialism even if such activities thumb
their noses at the U.S. Constitution and its claimed protection of the
individual. "People are not willing to speak up, people are willing to go along
[because it is in their self-interests]. That points to a systemic failure,"
says Jonathan D. Salant, an Associated Press Writer. Capitalism is simply about
the profit [money] God. If it were not so it would not be capitalism.
Even as corporations rush to install ethics officers in response to corporate
scandals this amounts to nothing more than smoke and mirrors. What real power
would ethics officers have anyway? The scandal-ravaged Global Crossing and the
U.S. Olympic Committee had moral watchdogs on duty; yet, they failed. Why the
failure? Because, institutionalizing ethics lacks the impetus to maximize value.
Adopting ethical standards may, in fact, create economic disadvantage. Every
business decision is associated with an opportunity cost and benefits. And
costs, as we all know, raise the price of the product-creating disadvantage not
only in the marketplace but also in attracting capital. Increasing risks, using
standard models (derivatives, coefficient of variation: risk/ return
trade-off), is unacceptable under any circumstances, especially risks that can
be avoided. Risk aversion runs deep and business leaders play to win. Playing
to win obviously involves risk. And risk is what Decision Theory is all about.
That is to say, decisions designed to achieve some objective, often under
conditions of uncertainty, has an expected value of payoff. But when decision
trees, or other models, must factor in a value for ethics (assuming such a
value could be achieved) the outcomes reach levels of uncertainty/ risk that
are mathematically, if not, intuitively absurd. The economic landscape is
littered with corporate skeletons that failed to heed caution when risk
analysis indicators flashed yellow.
When the risk fuel gauge moves toward full then businesses innovate methods of
jettisoning the added weight -- economic drag (inefficiency). Remember, if the
risk is such that the company becomes competitively disadvantaged jeopardizing
its standing in the market, the company will institute tactics to avert risk --
often taking drastic measures.
If ethics and/ or overly restrictive business laws are adopted in one region
raising the cost of business (competitive disadvantage) then corporations
simply move elsewhere; hence, the growth, in part, of multinational and
transnational companies (MNCs and TNCs). Capital and technical flight creates
enormous job losses and is rationalized as job creation in the host country
while providing cheaper products that benefit the consumer. No mention is made
of child labor; environmental devastation caused; or gross violations of human
rights inflicted. (Under capitalistic theology children, the environment,
natural resources, women, and men are simply resources to be exploited by the
Emperors and Caesars of corporations.) Often these host regions have no laws or
the laws are by-passed through "kick-backs" that allow for illegal activities
punishable under law in the corporation's country of origin. The ethics of
American business including MNCs and TNCs, according to K.P. Prabhakaran Nair,
a senior fellow of the Alexander von Humboldt Foundation, is a business of
ethical bankruptcy.
Take the recent and on-going case of Unocal (oil company) and the Burmese
government in which alleged gross violations of human rights (slavery and
torture) were conducted in the pursuit of oil and teak. The case goes before
the California Supreme early in 2004. This will be the first time that an
American company is being taken to court for human rights violations under the
Alien Tort Claims Act of 1789. Clearly, Unocal's executive officers, under the
banner of democracy, and the Burmese government, under the steel hand of
authoritarian rule, have become prostitutes selling their ethical flesh for
profit. Defenseless, poor people exploited as Unocal executives stagger and
sway drunk with profit.
Finally, ethics in business and the business of ethics are a discussion that
has no place at the economics table. Contemporary economics is fundamentally
incapable of dealing with the more esoteric elements of ethics. Microeconomics
and human behavior disregards ethics entirely and sharpens its economic
microscope to enlarge the issues of self-interest because "economic research
has scored its most impressive gains on the strength of this portrayal of human
motivation," stated Robert H. Frank in his book 'Microeconomics and Behavior'.
Marginal costs, supply and demand curves, budget constraints, the
Utility-Function Approach, and Determinants of Price Elasticity of Demand, to
name a few, dominate the thinking of business executives and boardrooms -- not
ethics. The language of business and economics is largely dehumanized. The
market is benign deflecting any consideration for individual consumers. Only at
the point of sale does the whole sordid affair take on human features -- a face,
a name, the color of a person's eyes or hair. Even here, the connection is
short-lived as daily figures are converted into per capita expenditure,
price-consumption curves, or rational choice and demand theories.
Macroeconomics is even further removed from human collaboration.
Does ethics have a place in business? Yes! Will ethics become an accepted and
formalized business principle? Probably not! A sprinkling of corporations will
conduct their affairs on strong ethical foundations largely because they are
niche players and in most instances ethics serve to buttress their
self-interest.
Behemoth corporations roam the business savannahs lurking to devour companies
in hostile takeovers. They dominate almost every sector of local economies and
global markets. "Through mergers, joint ventures, and strategic alliances,
corporations have formed 'virtual' monopolies - irresponsible entities that
maximize profits upon every occasion," says John Ikerd. Corporations are by
nature non-human entities - regardless of what the Supreme Court has said and
in spite of what managers, stockholders, or academicians may proclaim.
"Corporations have no heart, they have no soul," stated John Ikerd at a seminar
of the Organization for Competitive Markets, Omaha, NE, September 1999. With no
heart, no soul, no ethic can reside. Ethics as a consistent and fully
integrated business and political principle is not likely. Peter Drucker may be
right. Unfortunately, as the pressures of competition increase, as resources
become increasingly scarce, and as shareholders demand more value, ethics, even
if enacted through laws, will increasingly be viewed as market inefficiency and
where possible will be vigorously circumvented.
(c) Dale Barrett 2003
E-mail: seawhisper@juno.com
[top]
|
