IF IT’S LEGAL THEN SURELY IT’S ETHICAL?

The economist Milton Friedman argues that “there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”(1).

 These “rules of the game” are to be understood as a particular society's laws. In a nutshell, Friedman is arguing that business people are ethical if and only if they struggle to increase their profits and that they are entitled as part of that struggle to do whatever the law permits.

 As long as a person's profit-maximizing actions conform to the law and professional rules, he is, in Friedman's view, acting ethically.

 Ethics is not rules.

The activities of businesses under the Nazi regime should be sufficient to show that morality (2) and law are distinct. Helping to build extermination camps was legal and good for profits but it was not ethical. Even in a more just society, laws often state only a minimum requirement, usually what is enforceable in practice, rather than what is right.

 Yet Friedman’s answer is the most common one in business today.

Friedman’s approach to ethics is limited because rules cannot cover every situation. An ethical code that simply gives detailed rules and nothing else will sink under pressure either from clever people who find ways round the rules or from new situations the rules don’t cover.

 Another very real problem for investors who take law as their professional moral guide is the different laws that operate in the different countries where they do business. While the sale of the pesticide DDT is illegal in the EU, it is legal in many less developed countries. Does that make it morally acceptable to invest in factories producing DDT in poor countries?

 What distinguishes ethics from rules is that rules tell you how to act while ethics tells you how to think before acting.

 If rules are the bricks with which we build the house that shelters us from greed and selfishness, then the foundations of that house are ethics. Without ethical foundations, the house of rules will collapse under the growing weight of regulations and the pressure of financial storms.

 So what is ethics?

 

Put simply, ethics is the way we resolve conflicts of desire.

 If I earn a thousand dollars, I want to keep it all to buy a TV. The government wants to build a hospital and so wants to take my money. My neighbor also wants to take my money because he is out of work and wants to feed his family. There are three conflicting desires surrounding my thousand dollars.

 The ethics of our culture has devised a way of resolving this conflict: the government is entitled to say, 25% of my money (called income tax) and I am entitled to the 75%.My neighbor is entitled to none of my 75% but is entitled to some of the 25% in the form of unemployment benefit given to him by the government. Taxation and social benefits are not considered theft in our culture; they are considered right and proper.

 Ethics has resolved the conflict of desires and provided a basis upon which people can then write rules to govern taxation and social benefits.

 What is Business Ethics?

 Now the way that people resolve conflicts of desire has gone through many different phases in history. Within religious traditions there are moral rules revealed by God; these are ultimate but they no longer command general support within western culture.

 So from the 18th century onwards, European and North American society devised codes of ethics based on rational rather than revealed values. Two such systems carried all before them.

 Utilitarianism was devised in England, firstly by Bentham, who set out a simple principle: always acts so as to maximize pleasure and minimize pain. This was later modified by Mill to read: always act so as to maximize happiness for the maximum number.

 The German philosopher Kant said Utilitarianism was the morality of pigs, simply pursuing pleasure. He proposed instead that people should always act in accordance with that principle or maxim by which you want everybody to act; this universalisation principle is the rational way to know your moral duty.

 Customers are often unwittingly Kantian in their approach to providers: they insist that a company has a duty to care for them, even though the company will lose out by doing so.

 These two ethical systems have dominated Western culture for the last hundred years (omitting the Marxist ethic that was so influential in Eastern Europe, Russia and China). Ends or goals drive the first, while the second is based on duty. Most recent social, political and economic decisions in Western culture have been derived from one of these two principles.

Yet both are fraught not only with theoretical but also with practical problems. For example, are governments morally justified in fostering a high level of unemployment if it enables the majority to prosper? When is a minority so large that its unhappiness cannot be ignored, whatever the majority may wish? Does the maximum number include foreigners or just my own countrymen? And who defines duty?

 If I am a condemned man on death row, I want to universalize the principle of no capital punishment; if I am the father of the victim, I universalize the principle of an eye for an eye.

 Weak rule utilitarianism

In Financial Services, utilitarianism tends to dominate and this throws up particular variants of the problems already highlighted. Here, as in most areas, the utilitarian approach is not applied to individual instances; it is applied to the creation of rules. So, for example, rather than deciding if each instance of insider trading is immoral by utilitarian standards, utilitarian ethics concludes that the maximum happiness is generated by a rule against all insider trading.

 This Rule Utilitarian approach can be applied strictly (e.g. lying is always wrong) or weakly (e.g. lying is usually wrong but is acceptable to save life, as when soldiers are interrogated by an enemy).This Weak Rule Utilitarian Approach characterizes the attitude of Western ethical culture today.

 This approach is practical and easy to understand, yet it seems to encourage an attitude of reckless risk taking. For example, somebody agrees with the rules but knows that if he cheats a little at work no noticeable harm will be done. So if he gains $10,000 from a bank that has billions, $10,000 is a lot to my family and nothing to the bank; therefore the sum total of happiness is increased by utilitarian standards. Therefore, somebody might argue, this is not really immoral, even though it may be against the rules. So the clever cheat becomes a hero.

This attitude may be becoming more common in society and in Financial Services. Moreover, the perceived growth of this attitude makes clients suspicious of those who work in Financial Services. This paper therefore contends that we need a new approach to ethics if the infrastructure of Financial Services is to withstand the attacks upon it by the professionals who should be safeguarding it.4

Virtue ethics

‘Virtue ethics’ is an approach which is rooted in ancient Greek philosophy and which has experienced a revival among contemporary philosophers. This requires virtuous people to act virtuously in a virtuous environment.

 This, of course, begs the question: what is virtue? According to one contemporary philosopher, a virtue is an acquired human quality that enables us to achieve those goods which are internal to the practices that we value. This means that we do not look outside the activity in order to maximize happiness or universalize duty, instead we state those human qualities needed to do the job well within the terms of the job itself.

 This principle is well recognized in the medical world: I will give my patient the best treatment available no matter what the circumstances e.g. I may be shunned for treating a dying terrorist by those claiming the world is better off if he dies. In this instance the medical profession’s own standards are what prevail, not external considerations.

 We believe a similar approach is needed in Financial Services.

 Integrity: virtues and values

Many business codes of ethics insist that employees must work with integrity without defining this quality.

 We define integrity as the synthesis of the virtues. In practice, companies speak of values and we will use the word ‘value’ instead of the word ‘virtue’.

 The core principle of integrity is thus defined as a synthesis of values, comprising an integrated balance of sometimes-contradictory demands. As has already been stated, ethics is the resolution of conflicting desires or interests and integrity is the value that integrates all the other values.

 We need, then, to list some of those values which we wish to promote and then describe some practical examples. This will include not only values for the individual but also for companies and wider communities. People need to be an integral part of something larger than themselves, which must in itself have integrity – a virtuous environment within which to work.

 Fairness: rights and duties

A core value in contemporary society is justice or fairness. The popular insistence on rights is an expression of an ordinary person’s sense of fairness.

 Yet to be truly fair, we believe there must be an equal insistence on duties.

 For example, a consumer’s right to have an insurance claim paid quickly needs to be balanced by the consumer’s duty to tell the truth about the real value of items damaged. Fairness is a core feature of integrity, derived from people’s sense of dependency, and the insight that all human beings are inter-dependent.

 A word of caution is needed about the way people use the language of rights. To assert that there are natural rights can lead to a belief that rights describe some previous human condition where all was harmony and that we all have a right to this Garden of Eden that has been taken from us. Such is not the meaning of rights being used here. Instead of rights as descriptive, the meaning in Financial Services will be prescriptive. That is to say, the sector prescribes what its employees and consumers have a right to expect when doing business.

This will draw on a natural sense of the need for honesty, competence and so on, but in the end, the rights will be prescribed by the sector both through industry regulations and through firms’ own rules.

While there is a natural, descriptive ‘right to life’, is there a social, prescriptive ‘right to a pension’?

 The answer to the question “what is business ethics” is now clear. Business ethics will usually include as a necessary ingredient the laws of the country where the company operates, the exception being laws that are in themselves unjust. But in order to be complete, business ethics also requires a prescribed list of values, rights and duties which are to be understood and affirmed in the particular business under consideration. The next section addresses how such a prescribed list might evolve within Financial Services.5

1 Friedman, M,“The social responsibility of business is to increase its profits." In T. L. Beauchamp and N. E. Bowie (Eds.), Ethical theory and business (pp. 55-60). Englewood Cliff Financial Services, NJ: Prentice-Hall, 1993

2 For the purposes of this paper, we use the terms ‘ethics’ and ‘morality’ interchangeably, whilst we accept that philosophical distinctions can be made regarding their usage. 3

3 “After Virtue” by Alasdair Macintyre

4 The 2002 Reith Lectures “Towards Justice and Virtue” by Onora O’Neill contain an analysis of the contemporary insistence on rights and rules, and the need for this to be counterbalanced by duty and virtue.

 

Editor's note: This is the 2nd of 4 articles from a paper called "Integrity in Practice" for the British Financial Services Association. I want to thank both Father Christopher and Roger Steare for permission to print their article.  You can retrieve the complete copy of the article from Roger or you can contact me at principledynamics@gmail.com and I will send you a copy

 

 

About the Authors

 

CHRISTOPHER JAMISON    Worth Abbey

Father Christopher is Abbot of Worth, a Benedictine monastery in Sussex. The Abbey runs a School and a Centre for Spirituality. He has recently co-founded The Soul Gym with Roger Steare, to help business people ‘work out what’s right’. Born in Melbourne, Australia in 1951, Father Christopher holds an MA from Oxford in French and Spanish and a BA from London in philosophy and theology. He is co-author of “To Live is to Change” describing the process of change that the Catholic Church has gone through in the last thirty years. He was appointed headmaster of Worth School in January 1994, and has managed two major Development Plans, while participating in “Action Learning for Chief Executives” at Ashridge College. He was elected Abbot of Worth in July 2002.

 

ROGER STEARE   Ethicability

Roger Steare is an Executive Coach and Business Ethics Consultant with a practice in the City. He studied History of Philosophy at London University with Lord Russell, son of the philosopher Bertrand Russell. With Christopher, he participated in “Action Learning for Chief Executives” at Ashridge and established Roger Steare Consulting in 1998. Roger is a Fellow of the Recruitment and Employment Confederation and an Advisor to the Talent Foundation. He has been a frequent media commentator on workplace issues.

 

 

 

In October 2002, the FSA published Discussion Paper 18 “An Ethical Framework for Financial Services". In his introduction to this paper, Professor David Jackman stated that the FSA wants “to establish a clear and explicit, shared understanding about what integrity means in practice." Integrity in Practice was commissioned by the FSA in order to explain the foundations of ethical behaviour and the implications for Financial Services in practice. The FSA’s business ethics portfolio has now moved to the newly-formed Skills Council for Financial Services and this paper is published as a contribution to the Ethics Forum established by the Skills Council.

 

Comments

[Kira Goettling]

Ethical people obey the law unless there's a compelling reason why the law itself, is unethical. That said, people who obey laws are not ipso facto ethical folk.

[Robert Reil]

I remember a wise man once saying, "If it is right, but wrong, a door will open. If it is wrong, but right, the door will close".