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DOES BUSINESS ETHICS REST ON A MISTAKE?

John R. Boatright
Abstract- This presidential address to the Society for Business Ethics
argues that business ethics rests upon the mistaken assumption that
teaching and research in the field ought to aim at the incorporation
of ethics into managerial decision making. An altemative to this Moral
Manager Model is a Moral Market Model, in which the aim is to
develop markets that produce ethical outcomes. The differences
between the two models are discussed with reference to the themes
of responsibility, participation, and relationships
P
residential addresses before professional societies are often appraisals ofthe
state of the fieldto successes achieved, to failures (if any), and to the
challenges that lie ahead. By any measure, the academic field of business ethics
is prospering. We can take pride in our accomplishments, including the growth
of business ethics courses, the profusion of books and articles, an unending round
of academic conferences (that could inspire David Lodge to write a sequel to
Small World), and the development of journals and societies (especially our own
Society for Business Ethics and the journal Business Ethics Quarterly).
But what of our impact on business practice? Much of the support for busi-
ness ethics derives from the public's expectation that our academic activities
will trickle down to the real world. In headier moments, we picture ourselves as
high-minded missionaries, engaged in an arduous struggle to convert a heathen
mass from their idolatrous worship of the bottom line. If we are engaged in a
battle, the reports from the front are not very encouraging,
Newsweek columnist Robert Samuelson announced m 1993 that the
"good corporation"' that provided job security and generous benefits is
dead.' Among its successors is the "virtual corporation" made up of
temporarv alliances among small firms and individuals around the
world.-
Financially driven mergers and restructurings are the order of the day,
creating ever-larger firms that transcend national boundaries and shed
layers of iinneeded employees in their relentless march to greater share-
holder value.
Even giant corporations and nation-states are at the mercy of the world
currency market that (like the Internet) is controlled by no one.
1999 Business Ethics Quarterly. \o]ume 9. Issue 4 ISSN 1O52-15OX. pp 583-591
584 BUSINESS ETHICS QUARTERLY
It is safe once again in corporate America for CEOs to declare that their
job is to serve only the shareholders. "Chain Saw Al" Dunlap's proud
advocacy of "mean business" is very much in vogue (even if "Chain
Saw Al" himself has been felled with his own favored implement) .^
As "baby boomers" save feverishly for retirement, they have come to
expect 25 percent annual gains in their pension accounts, regardless of
the consequences. As Pogo said, "We have met the enemy and he is us."
Whether we in the field of business ethics have had any beneficial impact
depends very much on what counts as an improvement. Exactly what is it that
we are trying to achieve? Although each of us would probably give a slightly
different answer to this question, there is a rough consensus. We tend to focus in
our teaching and research on the high-level corporate manager, typically a CEO,
who shapes the environment of an organization and makes the key strategic de-
cisions. On the conventional view, this manager acts on competitive market
considerations within the limits set by law. The objective is clear: Make as much
money as you can without breaking the law! Or perhaps the objective is: Make
as much money as you can and still get away with it!
The field of business ethics offers a counterviewthat ethics ought to be
incorporated into management decision making and organizational design. Man-
agers ought to consider ethics along with law and profits, and they should create
organizations in which ethics plays a vital role.
I could cite many expressions of this view, but let me single out just one. Ken
Goodpaster labels the conventional view, in which ethics is merely a systemic
constraint. Type 2 thinking.'' The aim of business ethics, he claims, is to move
managers to Type 3 thinking, in which ethics is an "authoritative guide." Profit
and law are not ignored in Type 3 thinking , he says, but "respect for the rights
and concerns of all affected parties is given independent force in the leader's
operating consciousness."'
The view that I am describing has no name, so let's call it the Moral Manager
Model. On this model, the moral manager is not one who merely acts morally
but who thinks morallythat is, who actively includes moral considerations in
business decision making. And the goal of business ethics is to turn out moral
managers, that is, skilled moral reasoners.
Since I am going to throw stones at this view, let me admit that I am not
without sin. In the first chapter of my textbook Ethics and the Conduct of Busi-
ness, I introduce the economic, legal, and moral points of view and recommend
the integration of ail three.^ What I call an "integrated approach" closely re-
sembles Goodpaster's Type 3 thinking and the Moral Manager Model.
I now think that this view is mistakenor at least in need of substantial quali-
fication. If the Moral Manager Model captures what business ethics is all about,
then, I contend, business ethics rests on a mistake. But what's wrong with this
view? It IS so deeply ingrained in the business ethics literature that its truth
might seem obvious. And what is the alternative? What should business ethics
be about if not this?
DOES BUSINESS ETHICS REST ON A MISTAKE? 585
First, if the Moral Manager Model describes the aim of business ethics, then
we are fighting a losing battle. The most admired corporate executives fit the
conventional view of the hard-headed, business-savvy decision maker. And the
reports from the front do not describe trends that favor the Moral Manager Model.
The Moral Manager Model has its exemplars. Aaron Feuerstein of Maiden
Mills (who was our keynote speaker at last year's meeting) and Robert Haas of
Levi Strauss are successful business leaders who explicitly incorporate ethical
values in their decision making. Many of us teach the Principled Reasoning
Approach that Levi Strauss used in deciding whether to continue sourcing in
China.^ (I will not comment on the recent reversal of their initial decision to
withdraw.) We need to ask, however, whether Aaron Feuerstein and Robert Haas
are role models for all corporate chiefs, or whether their management styles are
to be recommended only under certain circumstances. Do they represent an op-
tion or a moral dictate!
Second, the Moral Manager Model applies primarily to high-level decision
makers in large business organizations. Most people in business are Indians, not
chiefs. The vast majority of people in this country are employed in small- and
medium-sized firms, many in non-business organizations, including government.
Many people are self-employed or joined in ventures. The Moral Manager Model
does not speak to their situation.
Third, we all engage in business activity, not only as employees but as con-
sumers, investors, and in a variety of other roles. Each one of us runs a small
business., known as a household. The word economics, as we all know, derives
from the Greek term for household management. In thinking about the Moral
Manager Model, I have paused to reflect on how I conduct my own life. I con-
sider myself to be a reasonably good, ethical person and a pretty good ethical
reasoner. Yet, I realize that I conduct business activity mainly as a typical homo
economicus. As the manager of a household, I employ maintenance and repair
workers; I buy groceries and other supplies; I borrow money from lenders. In
each instance, I act and think as a market participant who strives to obtain the
best value. Faced with this realization I have to ask myself: If this is how I
conduct my life, why should I expect the manager of a business organization to
act differently? What's wrong with managers being primarily economic actors?
Why should they be moral philosophers as well?
The Moral Manager Model rests, I believe, on the assumption that the busi-
ness organization is the fundamental unit of analysis for business ethics and that
a business organization is directed by its top executives. As a result, the central
task of business ethics becomes how to introduce ethics into corporate decision
making, which is to say the thought processes of managers.
This focus on the organization and its leaders is exemplified by the cases that
have powerfully shaped our conception of business ethics, such as the success
stories of James Burke at Johnson & Johnson and Roy Vagelos at Merck, or the
cautionary tales provided by the Ford Pinto and Nestle infant formula episodes.
These kinds of cases suggest that the introduction of ethics into business must
586 BUSINESS ETHICS QUARTERLY
overcome two main obstacles. One is the logic of bureaucracy, which has been
explored in business ethics by John Ladd and Robert Jackall in influential works.*
The other is the logic of the marketplace.
Bureaucracies and markets each have an ideal of rationality. In the face of
these two "logics," the fundamental problem of business ethics underlying the
Moral Manager Model can be further characterized as introducing ethics into
organizations that already embody two powerful ideals of rationality. The ratio-
nality of ethics needs to be combined somehow with the logic of bureaucracy
and the logic of the marketplace.
What's the alternative to the Moral Manager Model? The alternative is a con-
ception of business ethics that focuses on individuals acting in a marketplace.
Markets rather than organizations would be the focus of business ethics. And the
fundamental problem is how to create moral markets.
Of course, the justification of market activity is the point of Adam Smith's
famous "invisible hand" argument. By seeking personal gain in market exchanges,
a person "is led by an invisible hand to promote an end which was no part of his
intention." We point out to our students that this argument presupposes efficient
markets and effective regulation. And many ethical problems in business arise
from market and regulatory failures. Many of the leading questions for business
ethics ask how best to overcome these failures.
The Moral Manager Model places the responsibility on the leaders of busi-
ness organizations and seeks to influence their discretionary decision-making
authority. The model I proposelet's call it the Moral Market Modelwould
place responsibility on all of us to improve the business system. That is, to cre-
ate more efficient markets and more effective regulation.
Let me illustrate the Moral Market Model and contrast it with the Moral
Manager Model by briefly considering three prominent themes in business eth-
ics, namely responsibility, participation, and relationships.
One recurrent theme in business ethics is that individual responsibility has
been lost in the modern business system and ought to be restored. Robert Jackall,
in his analysis of corporations, documents the myriad ways in which individual
responsibility is diffused and evaded.* Ambrose Bierce in The Devil's Dictio-
nary defines a corporation as "An ingenious device for obtaining individual profit
without individual responsibility.""'
Echoing Bierce, Alan Wolfe describes the corporation, on the standard eco-
nomic view, as "a device through which human beings, who have moral
obligations, come together for the purpose of ridding themselves of their capac-
ity to exercise moral obligations."^^ The corporation, he adds, is a "mechanism
of responsibility displacement," and, he continues, "If chimpanzees could be
trained to count, they would be just as good, if not better, managers than human
beings."'^
The Moral Manager Model reflects these sentiments and offers a corrective.
A moral manager is one who takes individual responsibility and thereby becomes
more fully human, more than a counting chimpanzee.
DOES BUSINESS ETHICS REST ON A MISTAKE? 587
The Moral Market Model does not dismiss individual responsibility as unim-
portant but stresses the importance of role responsibility in economic
organizations. In order to enjoy the benefits of joint production, we commit our-
selves to certain roles and bind others to their roles. And we expect everyone,
ourselves included, to fulfill their obligations in those roles. Without a system of
role responsibility, large-scale business organizations and a global market sys-
tem would be impossible. On the Moral Market Model, individual responsibility
enters into the picture at the beginning, when we create roles and commit ourselves
to them. Once these roles are assumed, individual responsibility has limited scope.
The Moral Market Model's emphasis on role responsibility encourages a
market system and a system of corporate governance that minimizes individual
discretion and favors rules. William Baumol in his book Perfect Markets and
Easy Virtue: Business Ethics and the Invisible Hand., observes: "The invisible
hand does not work by inducing business firms to pursue the goals of society as
a matter of conscience and goodwill. Rather, when the rules are designed prop-
erly it gives management no other option."" Instead of "Increase responsibility,"
the motto ofthe Moral Market Model, then, might be "Reduce options."
Two examples can serve to illustrate the different approaches ofthe two models
with respect to responsibility. First, the American Law Institute's proposed Prin-
ciples of Corporate Governance includes a controversial section 201 (b) that would
permit managers to "take into account ethical considerations that are reasonably
regarded as appropriate to the responsible conduct of business." In short, man-
agers should have the freedom to act responsibly! Who could possibly oppose
this? This section is perfecrly in accord with the Moral Manager Model. However,
from a Moral Market perspective, the adoption of the ALI proposal would free man-
agers from their role responsibility. And that would make them not more responsible
but less so. The danger of section 201(b) is that it would upset the carefully defined
system of rules that keeps managers restrained, to serve society's interests.
Second, the Federal Sentencing Guidelines (also known as the Ethics Con-
sultant Full Employment Act) has been criticized because it makes the adoption
of ethics programs a matter of expediency rather than conviction. The Moral
Manager Model would have managers institutionalize ethics because that is the
right thing to do, not because it provides legal protection. The approach of the
Federal Sentencing Guidelines is right m line with the Moral Market Model,
however, because of its emphasis on creating market incentives.
Turning now to the theme of participation, the Moral Manager Model recog-
nizes that business organizations are undemocratic but insists nonetheless that
every group has a right to participate m decisions that affect them. In the ab-
sence of effective participation in decision making, managers should at least
consider each group's interests. This kind of consideration is an essential com-
ponent of Goodpaster's Type 3 thinking and also of stakeholder theory.
The Moral Manager model encourages participation in corporate decision
making. By contrast, the Moral Market Model emphasizes participation in mar-
kets. Not only do we participate actively in markets as consumers and investors.
588 BUSINESS ETHICS QUARTERLY
and perhaps as providers of goods or services, but business organizations them-
selves are a kind of market in which we participate as employees.
The two models offer differing prescriptions for increasing participation. The
Moral Manager Model favors more inclusive decision making. Thus it applauds
wider representation on boards of directors, other constituency statutes, and the
like. Despite this call for greater inclusiveness, the Moral Manager Model is
still highly paternalistic. In contrast, the Moral Market Model would remove
areas of decision making from managers and place them in other hands. Mean-
ingful participation on this model is the opportunity for each group to achieve
its own ends through participation in a market system.
Dan Gilbert makes this point in a critique of Goodpaster's proposal for Type
3 thinking. Although Goodpaster's project is motivated by the attempt to intro-
duce respect for persons into the corporation, Gilbert charges (correctly, I believe)
that it reflects a "profound disrespect" for persons as beings capable of pursuing
their own ends.'* The alternative for Gilbert is a conception of the corporation in
which individuals become independent by bargaining with others. This I inter-
pret as something akin to the Moral Market Model.
Let me offer two quick illustrations of the differences between the two mod-
els with regard to participation. Traditional corporate pension plans place control
in the hands of managers and thereby create an obligation for them to act re-
sponsibly. This is in accord with the Moral Manager Model. With the increasing
availability of portable, fully vested pension plans, employees are now freed
from a reliance on the good will of management and given the power to control
their own funds. This latter approach, I suggest, is more in keeping with the
Moral Market Model.
In a similar vein, secure employment in the American workplace has been
giving way to the concept of employability, whereby employees and employers
alike have an obligation to maintain marketable skills. Making secure employ-
ment a corporate objective accords with the Moral Manager Model by putting
responsibility in the hands of management. By contrast, enabling people to man-
age their own careers presents a Moral Market Model solution.
Finally, I come to the theme of relationships. Business ethicists have rightly
seized upon the importance of relationships in business and the role that integ-
rity, trust, and care play in developing and sustaining relationships. By so doing,
the field of business ethics has been able to make a significant contribution,
primarily because of the neglect of relationships in neo-classical economic theory
and the practice of American management.
The Moral Market Model does not neglect relationships but regards them
differently. First, some business ethicists appear to regard relationships in busi-
ness as having inherent value. We value relationships in our private lives because
they are essential to our search for meaning and fulfillment. To have relation-
ships is essential for being human. It does not follow, however, that relationships
have the same value in business.
DOES BUSINESS ETHICS REST ON A MISTAKE? 589
In some parts of the world, relationships are essential for doing business.
This sometimes takes the form of "crony capitalism," and we see the fruits of
this today in the wreckage of some Asian economies. An often-praised feature of
the Japanese economy is the close relationships that consumers develop with
retailers. The comer gas station provides solicitous, personal service for the price
of an expensive fill-up. In recent years, however, Japanese consumers have shown
that they don't want a relationship with the comer gas station. They prefer cheap
fuel in a quick, impersonal market exchange. You may recall the time when Al-
ice, in the Dilbert comic strip, was scheduling Saturday morning meetings because
she didn't have a life outside work and wanted the human contact.
On the Moral Market Model, the ideal business relation is not an open-ended
relationship but a fully-defined contractual relation. Unfortunately, completely
planned business relations are not possible for many reasons, the prime ones
being the complexity of business situations, incomplete knowledge, and uncer-
tainty about the future. A major challenge for business is to structure relationships
that compensate for the inability to write precise contracts. This task is the cen-
tral concern of agency theory.
Two points should be observed here. First, on the Moral Market Model, rela-
tionships are best avoided. They existor should existonly to the extent that
precise contracts cannot be written. Second, many means exist for structuring
business relationships where precise contracts are not possible. Integrity, trust,
and other ethical supports for relationships may be effective in some situations,
but they are not always essential to business relationships nor the most effective
means available.
These two perspectives on relationships have very practical implications for
regulation. Both self-regulation and government regulation have ranged between
two sets of polar opposites. The two poles in self-regulation are informal and
formal modes of social control. And government regulation in the United States
has alternated between the two poles of trust and contract approaches.
Sociologists have observed that as societies become more complex, they move
from informal social control based on personal relations to formal controls based
on impersonal contracts,'^ Whereas simpler natural communities tend to restrain
self-interest by developing social bonds, more complex artificial societies at-
tempt to channel self-interest in socially beneficial ways. The history of American
regulation reveals two opposing approaches to regulation. One is a trust approach,
which makes managers trustees or fiduciaries whose conduct is bound by social
norms. The other is regulation by means of contractual relations that operate by
market rules.'^
In general, the Moral Manager Model involves a preference for informal modes
of social control and a trust approach to regulation, whereas the Moral Market Model
favors formal modes of social contiol and a contract approach to regulation.
I would like to conclude hy speculating on the motivation for the Moral Man-
ager Model. Why has it dominated thinking in the field of business ethics? 1 see
590 BUSINESS ETHICS QUARTERLY
two motivating forces. One is a distrust of markets and a belief in the need for a
guiding hand. The moral manager is thus a part of Alfred Chandler's "visible
hand" that complements the invisible hand of Adam Smith. ^^ The other motivat-
ing force is the communitarian impulse, which resists the movement toward mass
society, in which personal and informal relationships are replaced by imper-
sonal, contractual relations. Communitarianism stresses the themes of
responsibility, participation, and relationships that I have discussed.
Finally, it has been observed that the depiction of a corporation as a commu-
nity that reflects the values of its top executives is an application of the policy
framework developed at the Harvard Business School.^^ The dominance of the
Moral Manager Model, therefore, might be attributed to the influence of Harvard.
The Moral Market Model, on the other hand, reflects more the thinking of the
Chicago school of economics. The Moral Market ModeK which I am proposing,
is in an early stage of development. I cannot describe it fully. But I invite each of
you, now sitting comfortably here in San Diego, to join me in moving away
from Boston in the direction of Chicago. In doing so, you will be taking an
exciting intellectual journey that promises to change the direction of the field of
business ethics.
Notes
This paper was presented as the Presidential Address to the Society for Business Ethics,
at the Annual Meeting m San Diego, California, August 8, 1998.
Robert J, Samuelson, "R.l.P.: The Good Corporation," Newsweek, July 5, 1993, p. 41.
^See William H. Davidow and Michael S. Malone, The Virtual Corporation (New York:
HarperBusiness, 1992)
^Albert J. Dunlap, Mean Business (New York Random House, 1996).
Kenneth E. Goodpaster, "Ethical Imperatives and Corporate Leadership,"' m Business
Ethics: The State of the Art, ed. R. Edward Freeman (New York: Oxford University Press,
1991)
^Goodpaster, "Ethical Imperatives and Corporate Leadership," p 97
6John R. Boatright, Ethics and the Conduct of Business, 2nd ed. (Upper Saddle River,
N J.: Prentice Hall, 1997), p- 19
'"Levi Strauss and Co.: Global Sourcing (A)," Harvard Business School, 9-395-127
^John Ladd, "Morality and the Ideal of Rationality m Formal Organizations," Monist 54
(1970), Robert Jackall, "Moral Mazes. Bureaucracy and Managerial Work," Harvard Busi-
ness Review, September-October 1983
'Robert Jackall, Moral Mazes- The World of Corporate Managers (New York' Oxford
University Press, 1988
10Ambrose Bierce, The Devil's Dictionary (New York: World, 1911).
"Alan Wolfe, "The Modern Corporation Private Agent or Pubhc Actor''" Washington
and Lee Law Review 50 (1993) 1686 (italics in the original),
e, "The Modern Corporation," p 1686
DOES BUSINESS ETHICS REST ON A MISTAKE? 591
'^William Baumol, Perfect Markets and Easy Virtue: Business Ethics and the Invisible
HandiOxioTd- Blackweli, 1991), p. 53
'*Daniel R Gilbert, Jr. "Respect for Persons, Management Theory, and Business Eth-
ics," in Business Ethics: The State of the Art, ed. R. Edwaid Freeman (New York. Oxford
University Press, 1991), p. 116.
'-'For an example, see E A. Ross, Social Control (New York. Macmillan. 1901)
'^The distinction is due to Adolf A. Berle. Jr. and Gardiner C Means. The Modern Cor-
poration and Private Property (New York: Macmillan. 1932)
'^Alfred D. Chandler, The Visible Hand- The Managerial Revolution in American Busi-
ness (Cambridge: Belknap Press. 1977).
'^Gilbert, "Respect for Persons. Management Theory, and Business Ethics," p 113.