Ethics for a New Economy

Can an increased focus on ethics bring us back from the financial brink?


Ask the average Joe the cause of the current recession and you'll likely hear an earful about sub-prime mortgages, people buying homes they couldn't afford and million­dollar bonuses spent on CEOs who failed to think ahead.

The complaints center more on ethical lapses than finances. And that begs the question, is a lack of ethics to blame for our current economic woes, or at least a large part of it? It's a fair question, and one that has received a lot of attention over the years as people look to understand the psychology of the business environment where what matters most is making the most money-even if in some cases that means cooking the books to inflate income.

"Ethics always concerns limits," says Annabel Beerel, PhD, a professor of ethics and the Christos and Mary Papoutsy Distinguished Chair in Ethics at Southern NH University in Manchester. "We've lost a sense of limits. ...

Adam Smith, the father of capitalism, said capitalism has a shadow, but that we would stop when enough is enough, but we didn't."

The corporate and economic excesses that have come to light-from sky-high CEO salaries to people buying more house than they can afford to billion dollar bailouts of banks and car companies-demonstrate the need for corporate America and individuals to carefully consider the ethical ramifications of their actions and decisions. The question becomes, is all of corporate America to blame, or just a group of select members?

"In this American Dream, we've lost our sense of balance and community," says Beerel, also a chartered accountant who has held positions in corporate finance and investment banking. "As a system, we have lost our way."

Others have a different perspective. Richard S. Shreve, adjunct professor of business ethics at the Tuck School of Business at Dartmouth in Hanover and a retired banker, says most businesspeople conduct themselves in an ethical manner. "After Enron and World Com, there has been a marked increased in business ethics and responsibility and compliance," he says.

Shreve says students also have a heightened interest in business ethics, adding that half of the Tuck School's graduating class elects to take the business ethics course. "These are well-meaning people with great integrity," he says.

But Beerel says many CEOs need to do some soul searching. She says companies need to examine the ethicality of salaries, especially CEO compensation packages. "If you're earning a gargantuan salary, it's unethical. Who really deserves millions?" she asks. "It's excessive." Certainly CEOs going before Congress asking for bailouts have felt the heat and public backlash as the average American worker, facing financial cutbacks and layoffs, hears of failing company heads pulling in six- or seven­figure salaries and bonuses for leading their firms into failure. But while those CEOs are being demonized, it doesn't mean the next generation of leaders is willing to give up the perks that have landed the current guard in trouble.

Beerel asks her students each semester if they would agree to cap personal income at $1 billion with anything made above that going to society. Many students refuse to set any personal income caps, even one as high and theoretical as $1 billion. "When people lose their sense of being grounded, the system will crack. It has to crack," Beerel says.

And it does seem that larger corporations, at least, didn't learn the lessons from the excesses of less than a decade ago when unethical behavior among the leadership at Enron and others led to scandal and corporate collapse. Beerel says it will require a cultural shift to truly address these ethical issues and government alone cannot be relied on to provide it. Just look at the government's response to Enron-era scandals. It passed the Sarbanes-Oxley Act to curb corporate malfeasance and introduced reporting requirements meant to create more transparency. "It cost Americans millions," Beerel says. "I'm sure there are many businesses out there that are ethical. The whole barrel may not be rotten, but a large portion of it is."

Corporate Social Responsibility

No doubt the recession and recent corporate scandals have many companies looking long and hard at their practices, but some were already doing so- in an attempt to be good corporate citizens as well as financially successful. Molly Hodgson-Smith, executive director of NH Businesses for Social Responsibility, says that is particularly true in NH, where there still exists a business climate of trust. However, she says this recession is a good time for companies to take stock of their values and to examine whether the decisions they are making are ethical and remain true to their values.

"There might be two camps of thinking­those that stay true to their core values that see them through anything, and the camp that thinks tough decisions require tough measures and sometimes those values will be abandoned," Hodgson-Smith says. "Going through your values and ethics should be more strategic. I encourage companies, if they haven't already, to be more strategic about developing an ethical approach. It should be incorporated into the culture of the organization. I have to do a gut check several times a day-is this the way we should go about this?" Hodgson­Smith says companies that remain transparent and resolute in their values and ethical practices will be better positioned corning out of the recession. "Effective leaders are doing this in a way that not only motivates employees, but builds brand loyalty with customers. All these things have a bottom line impact."

Corporate social responsibility practices, however, are not without challenges. "Some­times being socially responsible can cost you," Shreve says, pointing to pharmaceutical giant Merck, which developed a compound to cure river blindness, a condition rampant in third world countries. The company spent millions bringing it to market, despite know­ing it could never recoup its investment. Merck instead developed a program to give the medicine away for free, he says.

Reactionary measures to ethical malaise can carry an economic cost. "Where ethics has been part of the problem, businesses may take a more stringent attitude. For example, banks that were previously lax in qualifying borrow­ers for mortgages may go overboard and make borrowing more difficult," says Jim Wible, pro­fessor of economics at the University ofNH in Durham. "Often, small businesses have their credit reduced or rescinded as banks try to show they are being tougher on credit allocation. Of course this makes the recession worse."

The Ethics of Bailouts

The bailouts of companies deemed "too big to fail" by the federal government is an ongoing source of consternation among taxpayers, and they present an interesting ethical dilemma. One argument that could be made is that we need to take care of the majority and that the consequences of letting Detroit or major banks fail is too great, Beerel says.

"However, the problem arises in the short term versus the long term. All we're doing is staving off reality and you qlll't defer reality," Beerel says of pouring money into companies that seem doomed. "The prime task of a leader is to keep the group focused on reality when the reality is new." Beerel says the parallels of today's economy to that of 1929 and the Great Depression are "frightening." "They pumped money into industries then. What worries me, though, is I really don't see change. We're do­ing the same old, same old with the same old people with the same old ideas in industries that really need a big shakeup," she says.

Beerel says delaying the failure of compa­nies is not necessarily the ethical thing to do. Rather, she says, true leadership is needed at a grassroots level where communities figure out ways to help local businesses succeed. She sees opportunities for local chambers of commerce to help businesses find ways to extend credit to customers and work together within local networks. "What brings out the best in us are grassroots leaders who say, 'How can we take care of our community?'" Beerel says. "That is an opportunity that is very exciting. How many companies are exercising leadership in new ways today? At the end of the day, it's about who you are and what you stand for." .

(Posting date 19 August 2009)

Article posted in the Business New Hampshire Magazine, May 2009 Edition

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