Business ethics in board decisions

Friday January 22, 2010
Business ethics in board decisions
Whose Business Is It Anyway - By John Zenkin

THE concept of business ethics recognises that people in a company can relate to more than just profit maximisation when making decisions, even if it is not very clear how they should behave.
This lack of clarity comes from the fact that each person, let alone each culture, has their own unique way of combining the individual virtues that make up ethical behaviour.
Thus there may be many ways of being ethical and sometimes boards need to combine them to get to good and right decisions.
These different types can be grouped into five systems of ethical behaviour: Machiavellian, Utilitarian, Kantian rules-based, Rousseau’s social contract, and finally “Personalistic” ethics.
l Machiavellian ethics
These are pragmatic, weighing probable consequences and the likelihood of achieving given outcomes, often regardless of how the ends have been achieved. People practising this type of ethics will argue that the ends justify the means.
The merit of this system is that at least any decision being taken can be assessed in terms of whether it will achieve the desired ends; and if it fails this basic test, then it should not be taken.
However, there are two problems with this approach. First, it does not recognise that organisations need codes of conduct and rules to help people to make predictable and consistent decisions.
Second, it can lead to a failure of “Tone at the Top” with people encouraged to “do whatever it takes” – the kind of thinking that contributed to the recent failures of governance in Wall Street that have hurt us all so badly.
•Utilitarian Ethics
These are a more moral extension of Machiavellian ethics, where the outcomes are weighed up by calculating how to “achieve the greatest good for the greatest number” for both the company and its customers. Principles are important only as rules of thumb.
The problem with this type of approach is that it encourages the tyranny of the majority and can lead to ignoring the needs of minorities and so be used to justify persecuting minority shareholders, which is poor governance.
•Kantian rules-based ethics
Rules-based ethics (associated with the German philosopher Immanuel Kant) go one step further in that they also consider the effect actions have on the rules of the organisation and whether they adhere to given principles.
This approach tends to be bureaucratic and perhaps overly legalistic, sometimes with a rigid adherence to the rules without due regard for particular circumstances that may justify exceptions.
Of course, the problem is that if there are too many exceptions or waivers, the rules themselves and the system they represent are discredited; outcomes become unpredictable; and corruption and free riding are encouraged.
•Rousseau’s social contract ethics
Social contract ethics recognise the need for mutuality and reciprocity if companies are to flourish: both within the organisation itself, where “Do unto others as you would be done by” is as good a rule as any for behaviour, and between the company and the community it serves.
They also recognise that no company is an island and it must therefore behave responsibly towards the community, minimising the external costs the company creates, lest it create a “tragedy of the commons” with its associated risk of systemic failure.
The problem with this type of approach is when it leads to the kind of loyalist, tribal thinking within a profession so that bad practices are covered up and justified in the name of loyalty to the group (a favourite topic of films with rogue cops who are protected from Internal Affairs for example).
•Personalistic ethics
Personalistic ethics reflect what an individual feels about the decisions being taken. As such they often share the following three characteristics:
First, they are driven by the individual’s personal sense of virtue and how the decision will reflect on the person’s character and sense of self-worth;
Second, they may be based on empathy where the decision maker puts himself/herself in the shoes of the other person when deciding what to do;
Third, they may be based on intuition driven by conscience – asking the question “will I be able to sleep at nights” when making a decision.
Obviously it is important that board members must be personally comfortable with the decisions they are involved with.
The problem is that often people who decide on Personalistic ethical grounds become impatient with other people calculating what to do using either a rules-based or utilitarian approach, and may be uncomfortable with Machiavellian thinking.
To cover these five ethical approaches, boards should ask the following questions:
1. Will it achieve the desired outcome?
2. Will it be for the greatest good?
3. Will it respect the rules?
4. Will it be responsible?
5. Will we be able to sleep at night?
If the answer to all five questions is affirmative, they will have made a right-good decision.
•The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.