Business ethics (without the misery!)

Note: This blog is based on collaborative work I did at the University of Sussex with the brilliant Andre Almeida

Isn’t ethics a bit of a drag? Often, we think of ethical considerations as restrictions on the way we act. Without ethics we’d be free to do what we want, but with ethics there are boundaries that severely limit our options. On this gloomy view, self-interest and obligation are forever in tension. This understanding of ethics isn’t just implicit in our everyday thinking about what it is to be an ethical individual – it’s also implicit in our our everyday thinking about what it is to be an ethical business. I think this gloomy view should be scrapped in favour of a more optimistic approach to business ethics. But before I introduce that approach, let me say a bit more about what’s wrong with the gloomy view of business ethics.

On the gloomy view, an unethical business can simply pursue its own profit, whereas an ethical business must sometimes act against its own financial interests in favour of the wider interests of society. A business free from obligations to pay taxes, to make philanthropic donations, to care for its employees and to respect its stakeholders is a business that is free to maximise profit. A business that chooses to meet its obligations is most likely a less profitable business, since doing the right thing inevitably costs money. Acting ethically might be good for society, but it’s basically bad for business.

Many academics working in business ethics think that this miserable attitude to ethics is pervasive in the business world. Porter & Kramer, for instance, argue that economic theories have enshrined the problematic idea that ‘…to provide societal benefits, companies must temper their economic success’.

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The gloomy view is problematic for a number of reasons. First, it gives being good a bad reputation. Any self-respecting business person wants what’s best for their business, so if acting ethically inevitably means compromising on the success of your business then ethics becomes burdensome – it becomes an obstacle on the path to business success. Second, the gloomy view makes ethical business hard to sustain. With profit and ethics pulling in opposite directions, profit will sometimes win when it shouldn’t. This is a particular risk when a business is going through hard times. As we’ve seen with the fallout from both the economic crash and the recent Brexit vote, when the profitability of a business is threatened philanthropic projects are often the first things to be thrown overboard. Third, the gloomy view entails a muddled view of what the point of business really is. Is the purpose of a business to help others or to help itself? If it’s both, how on earth do we balance ethical and financial considerations when evaluating a business? With a double or triple bottom line, which bottom line should get priority when? This muddle makes the successful navigation of business decisions very difficult.

Hopefully I’ve done enough to convince you that the gloomy view is no good. But if I’m right that it’s no good, what should we replace it with? Thankfully, philosophy has provided some insights into what it means to be an ethical individual that transfer nicely to a business context. The idea that acting ethically means acting against your self-interest is associated (perhaps unfairly) with the 18th Century philosopher Immanuel Kant. Kant’s contemporary, the great poet, dramatist and philosopher Friedrich Schiller, skillfully mocks the gloomy view in the following epigram:

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Schiller argued that the absurd view of ethics captured in this epigram ‘…could easily tempt a weak understanding to seek moral perfection along the path of a gloomy and monkish ascetic.’ Against such a view, Schiller suggested that the truly virtuous person is one for whom duty and desire are in harmony. If you have what Schiller calls ‘a beautiful soul’, you simply want to do what’s ethical. Such a person doesn’t have to put their self-interest aside in favour of doing the right thing because, for them, doing the right thing is in their self-interest. Their desire and their conscience push in exactly the same direction, so no compromise is needed. Of course, most of us fall a long way short of Schiller’s ideal of the beautiful soul. Nevertheless, pursuing an ethical life becomes a lot less gloomy once you recognise that the ultimate aim is to bring duty and self-interest into harmony.

How can we apply Schiller’s model of virtue to business ethics? Schiller’s ideal is for duty and self-interest to be in harmony, so the virtuous business is one in which being profitable and being ethical come hand-in-hand. Such a business would make money by doing the right thing and do the right thing by making money. There would be no trade-off between financial and ethical considerations because the business will have developed in such a way that these two things push in the same direction. The ideal business isn’t one that compromises profits in favour of societal benefits, but rather one that makes profit by bringing societal benefits.

How could profit and ethics be in harmony like this? Let me give you an example. Grameen Bank was founded by Chittagong Muhammad Yunus in Bangladesh in 1976. Yunus introduced the practice of ‘microcredit’, giving loans as small as US$27 to people below the poverty line. The societal benefits of these loans were formidable, lifting countless families out of poverty by offering them the means to help themselves and to avoid predatory loan sharks. But the really interesting thing about Grameen Bank is that it makes a profit. It isn’t a charity that gives away money for the benefit of others and against its own self-interest. Rather, it’s a profitable enterprise that makes its profit by doing something beneficial to society, and ploughs that profit back into the business to yield more social benefits and more profit. Grameen Bank thus exemplifies how a good business can harmonise profit and ethics: the actions that make money are actions that bring societal benefit, and only by bringing those benefits can the business continue to make money.

Scrapping the gloomy view of business ethics in favour of this Schiller-inspired view promises to overcome the problems I mentioned earlier. First, business ethics needn’t have a bad press since business people can pursue what’s best for their business at the same time as pursuing what’s best for society. Second, business ethics needn’t be hard to sustain since there doesn’t have to be a difficult trade-off between profit and ethics, as the two push in the same in the same direction. This applies even when a business is going through hard times (it’s worth noting that Grameen Bank opened in New York a year before the financial crisis yet managed to grow steadily regardless). Third, business people can avoid a muddled understanding of what the point of business is. The point is to profitably do good, so in the ideal business the question of how to balance profit and ethics simply won’t arise.

Just as achieving Schiller’s ideal of the virtuous person is easier said than done, meeting this ideal of the virtuous business is pretty hard work. But lofty ideals are a valuable guide even if we can never fully achieve them. I’m reminded of the observation that even if you have no hope of reaching the North Pole, a compass can still help you head in the right direction. Perhaps the Schillerian ideal of the ‘beautiful business’ can act as a kind of ethical compass, and as a reminder that ethics doesn’t have to be a drag.

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Philosophy, Innovation and the ‘Infinite Why?’

Business requires innovation, but in the 21st century innovations are increasingly intangible. The great 20th century innovations – the refrigerator, the vacuum cleaner, the desktop computer – are material products you can grab hold of. In contrast, many of the great 21st century innovations will be immaterial. We’re living in a time of conceptual innovation. Just look at some of the big businesses born this century. Air BnB didn’t innovate a material product – they innovated an idea. So did Uber. So did Facebook. They were inspired to use existing technology in unexpected ways. Their innovations are worth billions of dollars, yet are completely intangible.

Philosophy is the study of concepts and ideas, and philosophers are in the business of creating new and improved ways of thinking about the world. In other words, philosophers specialise in conceptual innovation. Many of the methods philosophers use to innovate new ideas can be easily applied in the business world. One of the most important lessons to take from philosophy is that innovation requires us to ask ‘why?’. Everything we do is based on assumptions, and philosophers seek to scrutinise those assumptions. When you discover that one of your assumptions doesn’t stand up to scrutiny, you’re given the opportunity to replace it with a better way of thinking. Put another way, questioning your assumptions gives you the opportunity to conceptually innovate.

Philosophy isn’t the only discipline that questions assumptions. Elon Musk – one of the business world’s great innovators – says that the best way to innovate is to apply the method of physics. You can see his talk here. The method of physics is to strip away your assumptions until you get to first principles, and then to build everything up from there. This is certainly a step in the right direction, but as someone who uses the methods of philosophy my question is this: Why stop at first principles? What if your so-called ‘first principles’ are mistaken? What if challenging those principles is what’s needed to open up the next big conceptual innovation? To become better conceptual innovators, we have to embrace what I call the infinite ‘why?’. To embrace the infinite why is to recognise that there’s no end-point to enquiry. Once you start questioning your assumptions, you should never stop. You’ve got to keep on asking!

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A nice example of a business that questioned their first principles is Netflix. In the early days of Netflix, they were in the business of taking other companies’ films and TV shows and delivering them to customers online. If you had to pin down the ‘first principle’ of Netflix, you’d say that they are an intermediary between the producers and consumers of media. Of course, someone at Netflix was inquisitive enough to question this putative first principle. They asked ‘why can’t we make our own media?’ This conceptual innovation paved the way for Netflix to develop their own films and TV shows, and to become a much stronger business as a consequence.

Each one of us has gone through a phase of questioning everything. At about the age of 3, we reach a crucial cognitive milestone: we begin to ask ‘why?’ We want to know why things are the way they are, and we won’t accept ‘it just is’ as an answer. Somewhere along the line, we lose that habit. Perhaps it’s because we spend so much time in why-resistant environments. The world of adults doesn’t welcome having its assumptions questioned, but if there’s one thing philosophy teaches us it’s that those assumptions need to be questioned. In order to become better conceptual innovators, whether in life or in business, we need to find a way of returning to the inquisitive mind-set we had when we were 3 years old. We need to remember how to ask ‘why?’

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