When two prominent legal scholars put their personal stamp on the issue now galvanizing the planet, how ethics fits in with modern business, it is time to pay attention.
Thomas Donaldson, The Mark O. Winkelman Professor, Wharton School, University of Pennsylvania
BUSINESS ETHICS: WHAT EVERYONE NEEDS TO KNOW
An authoritative and practical guide to business ethics by experts J.S. Nelson and Lynn A. Stout
Written for both businesspeople facing real-life dilemmas and students studying ethical questions, this succinct book uniquely surveys materials from moral philosophy, behavioral science, and corporate law, and shares practical advice.
Nelson and Stout cover a wide array of essential topics including the legal status of corporations, major ethical traps in modern business, negotiations, whistleblowing and liability, and best practices. Written in a short question-and-answer style, this resource provides engaging and readable introductions to the basic principles of business ethics, and an invaluable guide for dealing with ethical dilemmas.
(Oxford University Press, 2022)
AN EXCERPT FROM
BUSINESS ETHICS: WHAT EVERYONE NEEDS TO KNOW
What are business ethics?
Business ethics are the set of moral principles that govern behavior in a specific sphere of life: the world of business. Some people think of the business environment as a cutthroat place in which people will do whatever they can get away with, including violating the law and misleading and harming others, in order to get ahead. This view, however, is misleading and inaccurate. Certainly, you can see instances of bad behavior in the business world (as in other areas of life), but most people with real experience in business will tell you that sound ethics are integral to a successful business career.
Business ethics embrace the idea of values and the importance of being willing to make moral judgments about right and wrong conduct. People often feel uncomfortable with the idea of exercising moral judgment. As you will see in this book, however, it is impossible to avoid this responsibility in business life and, indeed, in life generally. Moreover, although sometimes it can be difficult to figure out what the morally correct course of action might be, much of the time this becomes surprisingly obvious with a little guidance and forethought. (Of course, this does not mean that following the morally correct course of action will always be easy. We hope this book will make it easier, in part by showing how ethical behavior usually works out best in the long run.)
Like the idea of exercising moral judgment, the word “morality” makes some people feel squeamish. This is probably because the phrase is so often used in a religious or cultural context to defend idiosyncratic rules governing diet, dress, or sexual behavior. Business ethics take a more universal approach to moral rules. They are concerned with the basic principles that regulate our behavior in dealing with others in business, whether they are employees, customers, suppliers, or the general public.
Finally, business ethics are pragmatic. They offer concrete guidance for how to behave in business dealings, including advice for difficult situations. They also give practical guidance for daily decision-making.
What do ethics have to do with making money?
It’s nice to make money, and sometimes it’s a necessity. Business ethics teach, however, that we have a moral responsibility to pay attention to how we make money. Some ways of earning a living are better than others, and some ways of making money are simply ethically unacceptable (not to mention possibly illegal).
Let’s start with the positive story of how making money can be good not only for the person who makes money, but for society as a whole. You might be familiar with the 18th century economist Adam Smith’s parable of the market being an “invisible hand” that moves goods and services to those individuals who value them more. A farmer who has harvested more corn than she can possibly eat sells some of the corn for money that she then uses to buy a much-needed pair of shoes; while the shoemaker, who has manufactured more shoes that he can possibly wear, sells a pair to the farmer for money he can then use to buy some of the farmer’s corn for dinner. Both the farmer and the shoemaker have made money, and both feel they have been left better off. The world is a better place for their self-interested exchange. Each party has not only benefited him or herself, but someone else as well.
Unfortunately, it is also possible to make money without leaving the world a better place. This possibility is one of the principal concerns of business ethics. To use an obvious example, a burglar who makes money by breaking into other’s houses and stealing has not made the world a better place. Nor has the contract killer who commits murder for hire. Nor has the con artist who makes money by defrauding people.
These obvious examples illustrate an important point—as a general rule, it is unethical to make money by damaging others’ persons and property (economists call this “imposing external costs”) or misleading others. But what should we do when the situation is less obvious? When is it acceptable to profit from selling a product that provides clear benefits to some people, but also imposes some external costs on others—for example, mining a much-needed mineral, but using techniques that pollute the local water supply? When is it acceptable to sell something to a buyer whom you have not misled, but who believes something about the product that you know is not true?
Business ethics help us deal with these sorts of questions. They help us ensure that we are doing well by doing good, rather than doing well by doing harm.
How are business ethics different from general ethics?
Most people follow at least some ethical rules in their daily lives. (The small percentage of individuals who do not are called psychopaths; we discuss them some more in Chapters 2 and 12.) The world of business, however, presents some unique issues, which is why they have evolved as a specialized field of ethics.
One of those unique issues is the sheer size and frequency of the ethical challenges that businesspeople must meet. It is not unusual for those in business to be presented, almost daily, with opportunities to personally profit by violating the law or by harming or misleading others. The stakes can be enormous, especially when a big transaction or career-making decision is involved. This means people in business often face much larger temptations in the office than on the street. (Although it is usually not very tempting to shoplift a small item, the opportunity to make millions of dollars by insider trading or cheating on a large contract is far more enticing.) As a result, businesspeople must always remain aware of and sensitive to their ethical obligations. If they do not, they risk joining the long and sad parade of once-virtuous, but now notorious, white collar criminals like Enron Chair Kenneth Lay, Goldman Sachs director Rajat Gupta, and business maven Martha Stewart.
A second unique aspect of business ethics is that it operates in a social environment—business dealings—in which people, to some extent, tolerate, expect, and even praise the selfish pursuit of personal gain. This makes the business environment quite different from many other social environments in which we interact with other people. Few of us want to be perceived as selfish at a wedding reception or a bar mitzvah. But when we are negotiating a contract or trying to sell a product, a certain degree of material self-interest is expected. The key phrase here is the qualifier, “a certain degree of.” Business ethics help to keep us from crossing the line from legitimately self-interested behavior, over to unethical and/or illegal behavior.
Third, business ethics emphasize the obligations we owe not only to our friends and family, but also the obligations we owe to people with whom we have only an “arms-length” business relationship, and even obligations owed to total strangers. Indeed, sometimes business ethics go further still, and teach that we have obligations to intangible legal entities like corporations. This aspect of business ethics can raise some practical difficulties. It is relatively easy and natural for a person to remember the interests of friends and family whom she likes, and with whom she interacts on a daily basis. However, as we discuss more in Chapters 8 and 9, it is often more difficult for us to stay aware of, and respect, duties owed to people who we don’t know well and may have never met—much less duties owed to intangible legal entities. Business ethics help us find our way through this minefield.
Finally, a fourth distinguishing characteristic of business ethics is that ethical problems in this context tend to involve unique concepts and rules specific to the business world. Many of these concepts and rules are based on, or draw upon, legal rules that apply primarily to business institutions and business dealings. For example, in this book we will discuss fiduciary duties; rules against fraud; duties owed to corporations and other legal entities; and the resources and legal protections available to “whistleblowers.” Business ethics and law are deeply intertwined.
What does it mean to have an ethical duty?
An ethical duty is an obligation or responsibility that must be met without regard to one’s immediate self-interest. In other words, ethics require us to do our best to meet our obligations, even when we don’t particularly want to. In Chapter 2 we explore why, in the long run, ethical conduct generally works best for both individuals and societies. In the short run, however, complying with ethical duties typically requires the person with a duty to exercise at least a modest degree of self-restraint and sacrifice.
This is because ethical duties, including business duties, generally are intended to protect other people, like employers, customers, clients, contract counterparties, and the general public. Ethical duties require that we consider the welfare of others, not just our own welfare, in choosing how to act.
Having to respect the interests of others may not seem a very attractive prospect, especially if you’re the only person doing so. Bear in mind, however, that business ethics set out general principles that apply to everyone in the business world. This means that, when businesspeople generally comply with ethical duties, you may have to sometimes consider the interests of others—but also that they have to sometimes consider your interests, as well.
ABOUT LYNN A. STOUT
Co-author, Business Ethics: What Everyone Needs to Know
Lynn A. Stout was an internationally recognized expert, scholar, author, and speaker in the fields of corporate governance, securities regulation, financial derivatives, law and economics, and moral and ethical behavior. Known as a passionate teacher and mentor, Lynn pioneered the field of progressive business law.
As an American corporate law scholar, and a Distinguished Professor of Corporate & Business Law at Cornell Law School, she researched and wrote about corporate law, securities and derivatives regulation, law and economics, business ethics, and prosocial behavior in relation to the law.
Lynn served on or consulted to a number of non-profit and for-profit boards in the worlds of law, finance, and economics including the CFA Institute Board of Governors, the Financial Research Advisory Committee to the U.S. Treasury, the Aspen Institute's Business & Society Program, the Brookings Institute Project on Corporate Purpose, the Gruter Institute for Law and Behavioral Research, and the Eaton Vance Mutual Funds. She recently co-founded a nonprofit startup, The Ethical Shareholder Initiative, whose primary aim is to provide a platform by which shareholders can empower corporations to act for the common good.
Her other books include Cultivating Conscience: How Good Laws Make Good People (2011); The Shareholder Value Myth: How Putting Corporations First Harms Investors, Corporations, and the Public (2012); and Citizen Capitalism: How A Universal Fund Can Provide Influence and Income to All (published posthumously in 2019).
She died in 2018, with Business Ethics: What Everyone Needs to Know, in progress.