"The more I find out, the less I know."

Thursday - February 26, 2004 at 03:37 AM in

How Does a Business Behave Ethically?

In my last article , I showed that a business owes an ethical responsibility towards its employees, customers, community, and shareholders, in roughly that order. This was based on a practical consideration of which people and groups are most responsible for a company's success, or can cause it to fail. In other words, you want to behave nicely towards people who can help you.

The final question is, what actions does a business have to take (or not take) to behave ethically towards its employees, customers, community, and shareholders?
My guiding principle here is the golden rule: ethical businesses should treat others the way they would want to be treated in a similar situation. More specifically, an ethical business should behave:

1. Honestly
Behaving honestly means that a business does not attempt to deceive others. This covers a lot of ground, from accounting fraud, to claiming that a product does something which it was never designed to do.

Hardly anyone would disagree that dealing with employees, customers, etc., honestly is required of an ethical company. But the number of times companies deal with others dishonestly is astonishing. For example:

Accounting gimmicks: Many public companies, especially in technology (where the pressure to grow every single quarter is immense) play games like trying to convince customers to buy a bit more at the end of the quarter to make a target, or capitalizing what might otherwise be expensed. There is an ethical grey area here: it is OK to push hard to make a sales goal, but it is not OK to take it to the point where it distorts the underlying health of the company.

Overpromising: Salespeople are notorious for promising customers the moon, and probably everyone has had the experience of buying something only to discover that it couldn't do what you wanted it to. Software is particularly bad in this regard, as companies often try to inflate feature lists by including things which don't work, or are so marginal as to be useless.

2. Openly
Openness is a subset of honesty. It means that a business keep others informed about what it is doing and why. This does not mean giving away proprietary information, or tipping off competitors as to strategy, but simply letting others feel like they are in the loop.

Stated another way, behaving openly means not concealing information which someone might reasonably want to know, and which wouldn't harm the business to release. It also means not concealing information which might lead an employee, customer, community member, or shareholder to behave differently towards the company.

Some examples of information which is often inappropriately concealed: Known product defects; sudden adverse changes in the business environment; and the fact that different customers pay different prices (though it is reasonable to not release the exact prices others pay).

3. Consistently
Behaving consistently means not changing what a company does over time without reason. For example, if a customer calls MegaBank to check his account balance, that customer should be treated the same way every time. He should not get prompt service on one call, then a brush-off on the next, and be assessed a $2 fee on the third.

Or, if an employee keeps losing his keycard, he shouldn't be fined $10 one time, not charged at all another time, ignored the third time, reprimanded the fourth time, and fined $5 the fifth time.

Inconsistency is often the result of a company not caring enough about a person or group of people to take the time to provide a measured response to some request or action on the part of an employee, customer, community member, or shareholder; and it sends a strong message of not caring to the person being dealt with inconsistently.

Consistency is important, though, because it helps people understand how a business will interact with them. Without consistency, a person doesn't know what to expect, or how to go about getting what he or she wants.

4. Fairly
Fairness is the flip side of consistency, and means treating all members of a group in the same way. Fairness does not mean that everyone gets identical treatment, but that when the treatment is different, it is for reasons which are the same for everyone.

In practice, fairness is hard to enforce. People are always trying to gain some unfair advantage, and some are more persistent about it than others. It is tempting to give in to the salesperson who demands to stay in a four-star hotel when everyone else is staying at the Holiday Inn, especially if the salesperson is a top performer.

When such favors are discovered by others, as they almost always are, it breeds considerable resentment among those who did not receive the special favors. In the long run, this is usually more damaging than holding one's ground against the requests for unfair treatment.

5. In The Best Interests of Others
Probably the hardest part of behaving ethically is working in the best interests of others. This means that an ethical business needs to actively promote the interests of its employees, customers, community, and shareholders. Merely not getting in the way is not enough.

This does not mean that an ethical business should liquidate its assets and give them all to the starving hordes in Africa. Everyone is nearly always better off when the company is operating successfully, generating jobs and economic value, and actively contributing to the vitality of the community.

What it does mean is that an ethical business should work to make its employees, customers, community, and shareholders prosper. This is also in the best interest of the company itself: remember that these are the groups which contribute to the company's success, and when they all prosper, the business will prosper, too.

The hard part comes in figuring out what actions are truly in the best interests of others (as opposed to short-term gain with long-term damage); and how to balance competing interests of different groups.

For example, shareholders nearly always want a company to do everything possible to boost its stock price. While this may be to the short-term benefit of particular shareholders, it doesn't really help shareholders who don't actually sell the stock while it is high, and it actively harms future shareholders who bought while the stock was high, since it limits their gains. In the long run, it is nearly always better for the shareholders for the company to provide a good return over the long-term, either through dividends, or consistent growth; and to work to ensure that the stock price is reasonably consistent with the underlying value of the business.

In addition, since many of the actions companies take to boost their short-term stock price also harm customers, employees, or the community, a company can fail to meet its ethical obligations by focusing too much on the demands of one group.

So Why Is This So Hard?
I don't think it is necessarily hard to be an ethical business, but it requires being able to work with the big picture and the long-term view.

In the past few decades, companies in the United States have become focused on keeping shareholders happy to the almost complete exclusion of all else. A lot of good has come of this--for example, working to improve inefficient operations--but it has also been taken to an extreme in some cases.

The key is to focus on what is in the long-term best interest for everyone involved. In the short-term, employees, customers, the community, and shareholders often have competing interest. In the long-term, however, everyone's best interests are aligned in having a successful, prosperous enterprise which treats everyone honestly, openly, consistently, and fairly.

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