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Strategic Planning as if Ethics Mattered

Author(s): Larue Tone Hosmer

Source: Strategic Management Journal, Vol. 15, Special Issue: Strategy: Search for New
Paradigms (Summer, 1994), pp. 17-34
Published by: John Wiley & Sons
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Management Journal.
Strategic Management Journal, Vol. 15, 17-34 (1994)

School of Business Administration, University of Michigan, Ann Arbor, Michigan,
U. S.A.

Ethics and the moral obligations of management were an accepted component in the
planning process during the early development of Corporate Strategy as a field of study. It
is proposed that ethics must be brought back into that planning process in order to build
trust on the part of all of the stake-holders of the firm. Trust generates commitment.
Commitment ensures effort, and effort that is cooperative, innovative and strategically
directed is essential for success in a competitive global economy. Ethics should be central,
not peripheral, to the overall management of the firm.

Ethics and the moral obligations of management in corporate strategy. Simon certainly shared
were an accepted component in the strategic that view; he explained in his most famous work
planning process during the early development (1947: 47) that administrative decisions in an
of Corporate Strategy as a field of study. Barnard organizational context always had an 'ethical as
led the way here, as he did in so many well as factual content.' Learned, Christensen,
other conceptual segments of the discipline. He Andrews and Guth (1965: 520) devoted a chapter
described the functions of the executive as the to the 'the moral aspects of choice; the impact
need to: (1) maintain communication channels on the public good of the strategic alternatives.'
(2) ensure individual contributions and Schendel and Hofer (1979) followed with a
(3) formulate organizational goals. He then con- proposal for an enterprise strategy that would
tinued with the statement that this executive relate the organization to its social and political
process 'is not intellectual; it is aesthetic and environment in much the same way that corporate
moral, involving a sense of fitness, of appropriate-strategy interfaced with the industry structure
ness, of responsibility (1938 : 257). Further, in a and the economic environment.
quotation that is too little remembered, he An excellent beginning, but where do we stand
talked of the need for the executive to 'inspire now? The Strategic Management Journal is
cooperative personal decisions by creating faith certainly acknowledged as publishing the most
in common understanding, faith in the probability advanced work in the discipline, yet over the
of success, faith in the ultimate satisfaction of past 3 years the term 'ethics' has never burdened
personal motives, and faith in the integrity of the readers' understanding. Three articles with a
common purpose' (Barnard, 1938 : 259). semisocial benefit or stakeholder theme have
The integrity of common purpose was a been published. Bromiley and Marcus (1989)
common theme during much of the early work found that the equity market did not punish
companies for product recalls in the American
automobile industry during the 1970s. Weigelt
Key words: Strategy, morals, ethics, trust, commit- and Camerer (1988) observed that a firm's
ment reputation is an asset which can generate future

? 1994by John Wiley & Sons, Ltd.
18 L. T. Hosmer

rents, but stopped short of considering means has been, from an ethicist's point of view, less
of building that reputation beyond fulfilling than might be desired. Let us try a somewhat
industrial supply contracts. Kim and Mauborgne different approach.
(1991) looked at the procedural justice of the
strategic planning process, though justice in this
instance was defined only as the openness of the PURPOSE OF THE ARTICLE
communications between the head office and
subsidiary units in a global firm. This article will consider firstly whether it
The recent book publications in our field have is possible to build corporate strategy on a
paid equally little attention to ethics and the moral 'foundation of ethical reasoning,' and secondly
obligations of management. An examination of whether it is worthwhile in any sense beyond
the indexes in Lorange (1980), Porter (1980), that of moral sensitivity and/or ethical smugness
Quinn (1980), Ohmae (1982), Porter (1985), to do so. In short, this article will question
Hamermesh (1986), Prahalad and Doz (1987), whether the 'integrity of common purpose' should
Burgelman and Maidique (1988), Ghemawat be included as an integral rather than a peripheral
(1991) and Mintzberg and Quinn (1992) omit component in the strategic planning process.
any mention of the ethical and moral terms. The article will start with a definition of moral
We certainly have to recognize Freeman (1984) problems, which are the harms caused to other
who recommended negotiating with the various people in ways outside their own control. It will
stakeholders as a part of the strategic management then move on to the ethical principles, which
process. And certainly we should not forget are the means by which the decisions and actions
Miles (1982) who studied the strategic adaptation leading towards those harms to others can be
of organizations to externally imposed stress in objectively judged to be 'right' or 'wrong,' 'just'
the tobacco industry. But, these recommendations or 'unjust,' 'fair' or 'unfair.' The 10 most basic
and studies have remained peripheral to the or most widely accepted ethical principles will
main thrust of the conceptual development of be described in some detail. The article will next
the field. No one has followed through on the discuss briefly the methods by which the ethical
advice of Freeman and Gilbert (1988, xiii) that principles can be included in the strategic
we learn to build corporate strategy on a management process. The major discussion will
foundation of ethical reasoning, rather than be on the basic reasons they should be included.
pretending any longer that strategy and ethics Ethics do pay, it will be the conclusion of that
are separate and distinct and unrelated fields of section, but in a much longer time frame and
study. with a much wider organizational impact than
Freeman and Gilbert (1988), of course, took previously considered. The article will then end
a major step in that direction with their admo- with a specific proposal for a major change in
nition that if corporate strategy did not recognize the strategic management paradigm, and a very
the individual values and goals (or 'projects') of brief discussion of the research problems that
the members, both internal and external to the will be encountered in any empirical effort to
firm, then those members could not be expected provide support for that proposed change.
to cooperate to achieve organizational goals. Before moving on to the nature of moral
Ethical analysis, in the view of the authors, is problems, it may be worthwhile to consider why
the only means available to resolve conflicts in there has been so little work at the juncture
values, goals, and 'projects,' and consequently between corporate strategy and managerial ethics
essential in the processes of corporate strategy. since the early efforts by Barnard, Simon,
This same argument was expanded and then Andrews, and others. There are, it would appear,
compared to 12 alternative strategic processes in two very basic causes and one very recent change.
Gilbert (1992) who concluded that all 12 neglected
the essential concept of justice if one looked at
Divergent conceptual frameworks
the firm as a 'joint enterprise advancing the
individual purposes of people inside and outside As long as corporate strategy was based upon a
the organization' (Bauerschmidt, 1993: 398). strengths-weaknesses-opportunities-threats ap-
Both books are major works, but their impact proach (Andrews, 1971), and as long as mana-
Strategic Planning as if Ethics Mattered 19

gerial ethics was primarily concerned with the strategy? This effort has been epitomized by the
social responsibilities of successful corporations call of Freeman and Gilbert mentioned above to
(Ackerman, 1965) there was at the least the stop pretending that 'strategy and ethics are
possibility of an understanding on both sides. separate and distinct and unrelated fields of
Both used simple analytical procedures. Both had study,' and by the concern of Brady (1990: v)
generally similar terminologies. Both assumed that, 'Unless we connect ethical theory more
benign competitive conditions. But, corporate closely with management practice we may be
strategy in the 1980s 'adopted the language and dressing our business curriculum windows with
logic of economics.' (Rumelt, Schendel, and philosophical finery but failing to meet the urgent
Teece, 1991: 5). And, managerial ethics during need for clarity of thought in management ethics.'
the same time period moved from corporate Perhaps it is the need for 'clarity of thought in
social responsibilities to organizational decision management ethics' that has made the difference.
processes (Epstein, 1987). Now, the analytical The normative ethicists who previously were
procedures were very different. The basic termi- members of philosophy departments have now
nologies were very different. And, the benign become applied ethicists teaching at business
competitive conditions no longer existed. The schools. They have been forced to deal with
gap had become too large to bridge easily, while competitive issues in a global context. They have
the attention of scholars in both disciplines was had to recognize that business management
being focused on the special problems created within that context is more than simply a matter
by global competition. of profit maximization under market, legal, and
ethical constraints, and in which their only
function was to stress those latter constraints.
Inherent conceptual misunderstandings
They have had to consider how to maintain a
The two approaches to general management competitive posture and an ethical stance jointly.
separated during the 1980s, but in addition there There are some interesting things to be said
have always been misunderstandings between the and to be studied in combining competitiveness
two fields. Many persons active in the research and ethics. In short, to continue the simple
and teaching of business management view and by now perhaps annoying analogy, the
managerial ethics as a matter of personal virtue, foundations appear presently to exist for the
not corporate strategy. They believe that ethics proposed bridge on the side of the ethicists. Let
is concerned with issues of insider trades, bribery us move on, then, to a discussion of the nature
payments, untruthful statements and dishonest of moral problems, the principles of ethical
acts. These are the ones who often claim that, analysis, and the benefits of integrating corporate
'you can't teach ethics because the morals of the strategy and managerial ethics, and see if
students are fully formed by the time they reach equivalent foundations can be justified on the
college or graduate school.' See for example side of the strategists.
Kristol (1987), Vogel (1987), or Levin (1989).
Conversely, many of the people active in the
research and teaching of normative ethics have THE NATURE OF MORAL PROBLEMS
a deep distrust of business management, and
accept a very basic microeconomic view of the Moral problems are concerned with the harms
firm that stresses profit maximization at the cost caused or brought to others, and particularly
of human values. See Crisp (1987), Newton with the harms caused or brought to others in
(1988), or Hoffman (1990). To elaborate on the ways that are outside their own control. A
previous analogy of the 'gap too large to bridge,' decision is made to move manufacturing oper-
perhaps the foundations do not exist for the ations to Mexico in search of lower wage rates,
bridge supports. and x thousand people lose their jobs. A decision
is made to eliminate emergency response teams
at oil refineries and terminals, and y million
Recent conceptual clarification
gallons of crude are spread across the fishing
Why then is there beginning to be an effort now grounds and recreational areas of Alaskan resi-
to connect managerial ethics and corporate dents. Harms to specific individuals and groups
20 L. T. Hosmer

in ways outside of their own control are the focal and times. They are the basic rules or first
points' of moral problems. principles that have been proposed to ensure a
Moral problems in corporate management 'good' society. A 'good' society is one in which
are particularly complex because the harms to people willingly cooperate for the benefit of all.
some individuals and groups are inevitably See Rawls (1971) or Nozick (1974). 1 would
associated with benefits to other individuals hope that readers remember this definition; it is
and groups. The movement of manufacturing central to the latter argument.
operations to low wage rate areas in Mexico 'Normative ethics' is the study of these basic
obviously harms the displaced workers in the rules or first principles; the objective of that
United States, but equally obviously benefits study until recently was to select the one principle
the new employees in Mexico and the existing that all could agree to be logically the most
shareholders in the U.S. and may benefit the compelling. This is a goal that has never been
suppliers, distributors, creditors, managers, satisfactorily achieved. Normative ethicists are
and other workers in both countries through still debating the relative merits of the various
improved competitiveness. The spillage of crude principles after 2,400 years, following the earliest
oil in Prince William Sound obviously harms considerations by Protagoras and Socrates.
the local population as well as the regional 'Applied ethics' is the use of these basic
environment, but the elimination of the emerg- rules or first principles to gain insight and
ency response team-which had not been understanding. It must be admitted that this
needed nor used for more than 18 years- new approach-termed 'ecumenical' by Dunfey
doubtless reduced product costs for customers (1991 33) and a 'practitioner model (that) is
and increased dividend payments for owners. philosophically suspect' by Lippke (1991: 367)-
'Harms to others in ways outside their own is not as thoroughly accepted as are the modern
control' is a new though generally accepted definitions of moral problems described earlier.
definition in managerial ethics. See for example The new applied approach on ethical principles
Velasquez (1992). It has supplanted the earlier is currently more popular in instruction than in
definition that moral problems were decisions research, but the advantages are rapidly becoming
and actions that contravened the legal or moral more obvious. Even normative philosophers such
standards of the community for exactly the as Hoffman (1984: 263) have admitted that 'no
reason mentioned previously: the need for greater one theory provides a complete answer to the
clarity of thought. 'Harms to some and benefits question, what should I do?'
to others' is a new and partially accepted Multiple theories used to gain insight and
extension of that definition. See for example understanding do provide an answer to that
Hosmer (1992). It has been adopted to increase question, though at the expense of some rigor
realism and to recognize competition: some in the underlying concepts. It is no longer
managerial actions have to be taken, despite the necessary, for example, to recognize all of
harms to some, in order to maintain or enlarge the distinctions such as those between act
the benefits to others. utilitarianism and rule utilitarianism. Normative
philosophers such as Lippke and Hoffman who
have spent their working lives studying those
THE PRINCIPLES OF ETHICAL distinctions anid advancing the clarity of the
ANALYSIS principles are obviously hesitant to abandon the
rigor though they acknowledge the usefulness of
The principles of ethical analysis are the means the applied approach.
by which a person can objectively determine Here is a summary of 10 of the most cited
whether the decisions or actions that either have principles expressed in applied ethics terms; for
led or will lead to an expected mixture of benefits further explanation see any current text in
and harms are 'right' or 'wrong, 'just' or 'unjust,' business ethics such as DeGeorge (1989), Velas-
'fair' or 'unfair.' Ethical principles are not quez (1992), or Hosmer (1992). They are
subjective measures that vary with cultural, social, described in some detail in order to avoid any
and economic conditions; they are objective of the conceptual misunderstandings that have
statements that transcend countries, religions, prevented joint work in the past.
Strategic Planning as if Ethics Mattered 21

Self-interests (ethical egoism) Government requirements (Hobbes and Locke)

The argument here is that if we would all look Compassionand kindnesswould be ideal if everyone
after our own self-interests, without forcefully would be compassionate and kind, but everyone
interfering with the rights of others, then society won't be. People compete for property and for
as a whole will be better off for the members of position, and some people will alwaystake advantage
society will be as free and productive as possible. of others. In order to restrainthat competition and
Over the short term this seems to be a simple maintain peace within our society, we all have to
recipe for selfishness; over the long term, obey some basic rules from a central authoritythat
however, it creates a much more meaningful has the power to enforce those rules. In a democratic
guide for action for our long-term interests are nation we think of that authorityas the government,
usually very different from our short-term desires. and of those rules as the law. The principle, then,
The principle, then, can be expressed as 'never can be expressed as 'never take any action that
take any action that is not in the long-term self- violates the law, for the law representsthe minimal
interests of yourself and/or of the organization moral standardsof our society.'
to which you belong.'
Utilitarian benefits (Bentham and Mill)
Personal virtues (Aristotle)
Common obedience to basic rules would work if
The argument in this instance is that the lack of the people associated with the central authority
forceful interference is not enough. As we each did not have self-interests of their own. They do.
pursue our own self interests, even those that are Consequently we need a means of evaluating the
good only over the long term, we have to adopt laws of the government, and that same means can
a set of standards for our 'fair' and courteous be used to evaluate the justice of our own actions.
treatment of one another. We have to be honest, A law or an act is 'right' if it leads to greater net
open and truthful, for example, to eliminate social benefits than social harms. This is the
distrust, and we should live temperately so as not principle that is often summarized as the greatest
to incite envy. In short, we should be proud of good for the greatest number. A more accurate
our actions and of our lives. The principle, then, way of expressing the principles is, 'never take
can be expressed as 'never take any action which is any action that does not result in greater good
not honest, open and truthful,and which you would than harm for the society of which you are a part.'
not be proud to see reported widely in national
newspapersand on network news programs.'
Universal rules (Kant)
Net social benefit is elegant in theory, but the
Religious injunctions (St. Augustine and St.
theory does not say anything about how we should
Thomas Aquinas)
measure either the benefits or the harms-what is
Honesty, truthfulness and temperance are not your life or health or well-being worth?-nor how
enough; we also have to have some degree of we should distribute those benefits and allocate
compassion and kindness towards others to form those harms. What we need is a rule to eliminate
a truly 'good' society. That compassion and the self-interest of the person who decides, and
kindness is best expressed in the Golden Rule, that rule has to be applicable to everyone. This
which is not limited to the Judeo Christian principle, then, can be expressed as 'never take
tradition but is part of almost all of the world's any action that you would not be willing to see
religions. Reciprocity-do unto others as you others, faced with the same or a closely similar
would have them do unto you-and compassion situation, also be free or even encouraged to take.'
together build a sense of community. The
principle, then, can be expressed as 'never take
Individual rights (Jefferson and King)
any action that is not kind and compassionate,
and that does not build a sense of community, Eliminating self-interest on the part of the
a sense of all of us working together for a decision maker isn't really possible, given what
commonly accepted goal.' people actually are like. They are self-interested.
22 L. T. Hosmer

Consequently we need a list of agreed-upon law and the market-is more important than
rights for everyone that will be upheld by justice-the right to be included in the overall
everyone. These rights would certainly include distribution of goods and services. If so, then
guarantees against arbitraryactions of the govern- the only agreement that would be made under
ment and would ensure freedom of speech, of the conditions of the Social Contract-in which
assembly, of religion, etc. and would provide people do not know who would be rich and who
security against seizure of property, interference poor, who active and who slothful-would be
with privacy, or deprivation of liberty without that no law should interfere with the right of
due process. The principle, then, can be expressed self development, for self development will
as 'never take any action that abridges the eventually contribute to the welfare of society.
agreed-upon and accepted rights of others.' The principle, then, is 'never take any action
that will interfere with the right of all of us for
our self-development and self-fulfillment to the
Economic efficiency (Smith, Friedman and
limit of our abilities.'
Let me stress, once again, that these ethical
Basic rights are meaningless without the essentials principles of analysis are objective, not subjective.
of food, clothing and shelter. Therefore we should Let me state, as clearly as I can, that they do not
maximize the output of the needed goods and vary by culture, by country, or by time. The rule
services at minimal usage of resources by setting of Rawls, for example, that we not harm the least
marginal revenues equal to marginal costs. At this among us, those with the least education, the least
point the economic system will be operating as income and wealth, the least ability to influence
efficiently as possible, and we can reach a condition the events which affect them, means exactly the
known as Pareto Optimalityin which it is impossible same thing in Uzbekistan, India, Japan, and New
to make any one person better off without harming York City. We can certainly disagree on exactly
someone else. The principle, then, is 'always act who qualifies as the 'least among us' on a global
to maximize profits subject to legal and market scale. We can certainly ask whether peasant
constraints, for maximum profits are evidence of farmers in Uzbekistan are better or worse off than
the most efficient production.' homeless residents of New York City. But the
rule does not require either selectivity or precision.
It is in fact very straightforward:we should not
Distributive justice (Rawls)
harm either of those groups for our own benefit.
The problem with the economic efficiency argu- We do not have to help them; we should merely
ment is that the market distributes the output of avoid harming them in order to help ourselves. A
needed goods and services unjustly, for it excludes simple and, to my mind, decent ethical principle
those who are poor, uneducated, or unemployed. of analysis that is objctive, consistent, and timeless.
We need a rule to ensure that those people are
not left out. If we did not know who among us
would be rich and who poor, who educated and JUSTIFICATION OF THE OBJECTIVITY
who uneducated, then any rule that we made OF ETHICAL PRINCIPLES
for the distribution of the output goods and
services could be considered just. It can be Many people confuse morals, values and ethics
argued that under those conditions-known as and this has led to a belief-widely accepted
the Social Contract-the only agreement we could among both the theorists and practitioners of
make would be that the poor and uneducated and management-that the ethical principles of analy-
unemployed should not be made worse off. The sis are not and cannot be objective, consistent,
principle, then, is 'never take any action in which and timeless. Let me digress for a moment here,
the least among us are harmed in some way.' to explain the ethicist's view of the important
distinctions between morals, values, and ethics,
and the consequent reasons for the reliance that
Contributive liberty (Nozick)
can be placed upon the objectivity; consistency;
Perhaps liberty-the freedom to follow one's and timelessness of ethical principles.
own self-interests within the constraints of the Most people, when they encounter a moral
Strategic Planning as if Ethics Mattered 23

problem in which some individuals or groups are shorthand definition of a value is a broad
going to be hurt or harmed in some way while preference for one state of affairs over others'
others are to be benefited, turn first to their (1994: 389). Rokeach in his truly basic work
moral standards of behavior. Moral standards do (1973) identifies instrumental values as desirable
vary by culture, by country, and by time. They modes of conduct and terminal values as desirable
are subjective gauges of conduct. They are the end states of existence. The desirable end states
way we human beings intuitively feel about the of existence or value judgements clearly dominate
rightness or goodness of various actions. the desirable modes of conduct or moral stan-
Moral standards have been more formally dards.
defined as 'the means by which we judge our McCoy adopts this priority or preference
actions, and those of our neighbors' (Hosmer among end states view of values when he states
1987: 96). Moral standards are 'the expectations that it is necessary to take more than profit into
of society relative to the conduct of an individual account in business management, and that 'values
that affects the interests of other people' beyond the short-term bottom line are a necessity,
(Beauchamp and Bowie, 1979: 3). These 'means not an option, to be considered' (1985 : 6).
by which we judge our actions' and those He continues with the statement that making
'expectations of society' will obviously vary with decisions and setting policies in a business firm
the background of the individual and the culture involves choosing between competing purposes,
of the society. Moral standards, most ethicists and that choosing involves having a clear listing
readily admit, are not objective, consistent, nor of priorities or values. The paramount task of
timeless. They are personal, and vary with the senior executives, McCoy concludes, is the setting
individual. of priorities, or the management of values.
Value judgments are the second means most McCoy does not state, however, how those
people use to decide what is 'right' and 'just' values to be managed should be selected for it
and 'fair' when confronting a moral problem in seems clear to most of us that the values of the
which some individuals or groups are to be hurt senior executives will doubtless differ from the
or harmed in some way while others are to values of the hourly employees, and it seems
be benefited. For simple moral temptations, even more obvious to those who have had global
particularly those involving such basic issues as experience that the differences between the
insider trading or bribe paying where the harms values of those two groups will either narrow or
are obvious and widespread and the benefits are widen once we reach India, Japan, or Europe.
limited and focused, there is no need for most Value judgments are similar to moral standards
of us to go beyond our personal moral standards. in the view of most ethicists: they are variable.
But, for the more complex managerial dilemmas, They are not objective, consistent, and timeless.
where the outcomes are mixed as in the coal- Again, they are personal, and vary with the
fired generation of electricity which results in individual.
low costs for the consumer and acid emissions Moral standards and value judgements differ
for the environment, or where the duties are between people. There have been numerous
unclear as in corporate downsizing where the studies in anthropology, sociology, and a new
harms for a small group are offset by benefits subfield now known as descriptive ethics con-
for a much larger number of individuals, most firming these differences between social groups,
people move from their moral standards of national states, and historical periods. It is not,
behavior to their value judgments of purpose. in my opinion, necessary to cite those studies.
Value judgments of purpose also vary by We all have experience of these differences, and
culture, by country, and by time. They are accept their existence.
subjective evaluations of what we think is The reasons for these moral and value differ-
important. They are the way we human beings ences between groups, countries and times are
intuitively feel about the rightness and goodness not as clearly known, nor as widely accepted.
of various goals. Kohlberg (1981) provided a definitive study of
Value judgments in more formal definitions the moral development of individuals, through
are thought of as priorities by Hosmer (1994) stages. It now seems apparent, however, that
and as preferences by Hofstede (1984). 'A there are religious/cultural and economic/social
24 L. T. Hosmer

and religioustraditions

FPP Jo Benefits
Ethical 0* tosome
principles Valuejudgments Moralstandards -_- | Moraldilemmas
analysis ot purpose of behavior ot management Harmsto

f t others

Socialand economicsituations

Figure 1. Relationships between morals, values and ethics

influences upon that development. See, for Ethics has been more formally defined as
example, Likona (1976) or Gilligan (1982). These thinking about moral standards in a logical and
influences have not been as definitely studied, structured manner (Frankena, 1973). It is the
but it is certainly possible to cite Inkles and study of what is good or right for human beings
Smith's (1974) discussions of the changes in (Hoffman and Moore, 1984). It is the search for
personal values and behavior patterns as a result the general character that makes right acts right
of economic development; Matasugu's (1982) (Ross, 1930). Ethics, finally, has been defined
description of the influence of national culture by DeGeorge in a sentence that almost exactly
on the development of moral standards; and follows the conceptual framework expressed here
Haney's (1983) study of the impact of economic as 'a systematic attempt through the use of
and social variables upon the norms of acceptable reason to make sense of our individual and social
behavior as examples of the needed work in this moral experience in such a way as to determine
area. the rules which ought to govern human conduct
Ethical principles, however, do not differ and the values worth pursuing in life' (1982: 12).
between people. They remain exactly the same In summary, we can legitimately justify the
across cultural groups, national states, and conception of ethical principles as objective,
historical periods. They form the bedrock of consistent, and timeless if we accept the proposed
moral philosophy. They are, to repeat the earlier distinctions between morals, values, and ethics,
definition that I peremptorily asked readers to and if we understand that only our moral
remember, the first principles of what constitutes standards and value judgements are subject to
a 'good' society, and a 'good' society has been cultural, religious, social and economic influences.
further defined as one in which people willingly The ethical principles are not subject to those
cooperate for the benefit of all (Hobbes, 1986, influences. This is the accepted view, as was
Rawls 1971, or Nozick 1974). cited in the discussion, of most normative
Ethical principles are the fundamental rules ethicists.
by which an individual can, if he or she chooses
and has the necessary knowledge of the principles,
examine his or her moral standards and verify ETHICAL PRINCIPLES APPLIED TO
his or her value judgments. Ethical principles STRATEGIC MANAGEMENT: THE
are, finally, the topic of Socrates most METHOD
impassioned plea: 'The unexamined life is not
worth living' (Plato, 1955 : 43). This was his final What does all this mean? What possible connec-
statement in his defense at the trial that led to tion can the closing statements at a trial in
his death in 399 BC. It has been taken by 399 BC have with the managerial practices of
generations of scholars to mean that we should the late 20th Century? Let us say that you
all examine our standards of behavior and our accept, for now, the proposal that the ethical
choice of goals using the fundamental logic of principles of analysis are objective, not subjective,
the ethical principles of analysis. and that they do provide collectively a way of
Strategic Planning as if Ethics Mattered 25

deciding what is 'right' and 'just' and 'fair' in to meet those objectives are prepared by the
human actions and goals. How can they be used divisions and approved by the headquarters, in
in management, and-particularly-how can they sequence. It is clear that ethical considerations
be used in strategic management which deter- can be part of the approval process at all three
mines firstly the goals, policies, and character stages. The important issue, however, is not
(Andrews, 1971) and secondly the competitive whether ethical principles can be included in the
posture and position (Porter, 1980) of the firm? planning process; it is whether they should be
These 10 ethical principles of analysis provide included.
different perspectives, different ways of looking
at either the content or the process of strategic
management decisions and actions. The more ETHICAL PRINCIPLES APPLIED TO
usual perspectives are those of (1) neoclassical STRATEGIC MANAGEMENT: THE
economics which uses accounting measures of REASON
return and/or stock price changes, (2) industry
organization economics which uses sustainable Now we come to the critical issue. Granted that
competitive advantages and/or market share ethical principles are objective, and do provide
improvements, and (3) population ecology, which different perspectives that can help in determining
uses organizational survival, growth and/or devel- whether a given decision or action can be
opment. considered to be 'right' and 'just' and 'fair.'
Currently changes in corporate or divisional Granted that it is possible to include these ethical
strategies are examined using those measures principles in the strategic management process
from neoclassical economics, industry organiza- so that given decisions or actions that impact the
tional economics, and population ecology. What welfare of stakeholder groups can be considered
effect will this proposed change have upon our to be 'right' and 'just' and 'fair.' The critical
return on investment and our stock price? Upon question is whether we are under any compunc-
our competitive advantage and our market share? tion to do so.
Upon our organizational potential for survival, It may make us feel good to be moral. It may
growth, and development? make us feel superior to be moral. It may even
If we wish to add ethical considerations to make us feel less susceptible to legal claims
strategic planning, then we must begin to look from unfairly discharged employees and/or badly
at those proposed changes using the perspectives misinformed customers to be moral. Why should
and the measures of the applied ethical principles. we do so?
What effect will this proposed change have upon The argument of this article is that it may or
our long-term, rather than merely our short- may not be nice to be moral, it may or may not
term, self interests? Is this proposed change open be better to be moral, it may or may not be
and honest and truthful; and something of which prudent to be moral, but that it is essential in
we could all be proud if it were to become any competitive sense to be moral. Let me make
widely known? Does it build a sense of community this argument in a series of propositions:
among all of our stakeholders, or does it tend
to destroy-or even worse, to exploit-that sense Proposition I Companies operating in a com-
of community? petitive global economy are dependent upon a
It is assumed that any company adding these wide range of stakeholders.
ethical considerations to the strategic planning
process currently uses some approximation of Stakeholders have been defined (Freeman
the iterative planning system originally described 1984 : 46) as those groups that 'are affected by
in Chandler (1966) and then further detailed by and can in turn affect the achievement of the
Lorange and Vancil (1977) for multidivisional organizational objectives' of the firm. There has
firms. A statement of planning objectives is first been little debate about that concept. The ability
prepared by the central office, and then strategic of stakeholders to affect the achievement of
plans (the method of competition), program objectives, both negatively and positively, is
plans (the allocation of resources), and budgetary widely accepted though seldom explicitly men-
plans (the estimation of revenues and expenses) tioned in the literature.
26 L. T. Hosmer

Which individuals and groups should be many of the popular management books of the
included among the stakeholders? There is less 1980s such as Peters and Waterman (1982) and
agreement here, but hourly workers, administra- Pinchot (1985) stressed the need for innovation
tive staff, functional and technical managers, and entrepreneurship. The problem was that the
senior executives and the other groups that fit focus seemed to be on new products rather than
within the hierarchical boundaries of the firm are on new strategies, and that the entrepreneur or-
almost always included. Material and component more properly-the intrapreneur often seemed to
suppliers, and wholesale and retail distributors, be a loose cannon, paying little attention to the
outside of the hierarchical boundaries but within directions or intentions of the management.
the industry limits, are generally included follow- The recent work of Hamel and Prahalad (1989)
ing the examples of the Japanese keiretsu. seems much more relevant to strategic rather
Customers often are included, following the than product innovation, though it continues to
precepts of the total quality approach. Creditors, focus within the hierarchy of the firm. They
investors, and the organizations that supply start by deriding organizations so 'hidebound, so
advanced technologies and trained personnel are orthodox ridden that the only way to innovate
equally necessary to the firm though less subject is to put a few bright people in a small dark
to their direction and control, and may or may room, pour in some money, and hope that
not be included. Industry associations, interest something wonderful will happen' (1989: 66).
groups, joint ventures, and strategic alliances are They then stress the need for improvisation,
even further out on the periphery of the creativity, and innovation. 'While strategic intent
organization, but able to interact with domestic is clear about ends, it is flexible as to means-it
and foreign governmental agencies which obvi- leaves room for improvisation. Achieving stra-
ously can affect the operations of the firm, and tegic intent requires enormous creativity with
again may or may not be included. respect to means . .. The goal is not competitive
The issue, however, is not whether or not imitation but competitive innovation' (1989: 67).
these groups have been included at some point Does 'competitive innovation' come only from
in the past in a definition of an extended lower level employees, as seems to be implied
organization. The issue is whether or not these in Hamel and Prahalad? Or, can this key to
groups at some point in the future can affect the competitive success come from any and all of
achievement of the objectives of the firm. It the stakeholders, including employees, suppliers,
seems reasonable to make the assumption that distributors, customers, creditors, owners, tech-
they can. Figure 2 provides a graphic depiction nology centers, educational institutions, industry
of the full range of stakeholder groups following associations, and all of the other groups shown
that assumption. in Figure 2. Innovations reducing the cost of
health care or increasing the supply of trained
Proposition 2 Companies are dependent workers would certainly improve the competitive
upon their stakeholder groups not only for position of companies in a global economy, for
cooperative actions but also for innovative example, so it would seem clear that creativity
developments. and improvisation can and should come from
any and all of the stakeholders. At all events, it
The need for cooperation among the stake- seems reasonable once again to make that
holder groups is obvious; indeed, this need assumption.
is inherent in the definition of stakeholders
previously cited as the individuals and groups Proposition 3 It is difficult to motivate
who 'are affected by and can in turn affect the behavior that is both cooperative and innovative
achievement of the organizational objectives'. by all of the stakeholders of the firm.
The question, however, is whether cooperation
in the sense of 'you tell us what to do and we'll If we accept the first assumption that companies
do it' is enough. Perhaps innovation is also operating in a competitive global environment
required for meaningful technology advances, are dependent upon their stakeholders, both
product and process developments, cost those within the firm and those outside the
reductions, and quality improvements. Certainly formal authority structure, and if we accept the
Strategic Planning as if Ethics Mattered 27

National National National National

financial regulatory social support
policies policies policies systems

Industry Domestic Publicinterest

trade government gop
associations ageniePs

I t :1

{ Material ! | Boundaries
suppliers the


Creditsources Personnelsources

Boundariesof the actualfirm

Equitysources Technologysources



Competitive Foreign Cooperative

joint government strategic
ventures agencies alliances

Global Global Global Global

trade exchange factor resource
agreements rates costs constraints

Figure 2. An extended view of business organizations

28 L. T. Hosmer

second assumption that this dependency extends creativity-cannot be accurately measured, and
beyond simple cooperative acts to the much therefore investments in information systems or
more complex innovative developments, then we management structures to detect self serving acts
are faced with the need to motivate creativity and lack of effort (the joint moral hazards)
and improvisation. cannot be justified (Demski and Feltham, 1978,
Motivation has been the topic of extensive again quoted in Eisenhardt, 1989).
work in the behavioral sciences. See, for example, Outcomes in some of these nonprogrammable
Steers and Porter (1987). Most of this work tasks can be measured, but then the risk is
however has focused on cooperation, not inno- transferred to the agent. The risk is transferred
vation, by persons within the formal, not the because the outcome is only partially a function
extended, organization. The usual recommen- of the behavior; technological feasibilities, com-
dation starts with a proposal that goals be set, petitive actions, government policies, economic
either by joint agreement or by administrative and social changes all 'cause uncontrollable
fiat. Actual results are then measured against variations in outcomes' (Eisenhardt, 1989: 61).
these planned outcomes, the divergences are Outcomes in other nonprogrammable tasks
analyzed, and positive or negative performance i.e., those that 'take a long time to complete,
evaluations are computed. Incentives are then involve joint or team effort, or produce soft
paid to reward the positive performance evalu- outcomes' (1989: 62) cannot easily be measured.
ations. What can be done when it becomes overly
The incentives can be financial (commissions expensive to transfer risk to the agent in the
or bonuses), positional (promotions or 'perks' in event of measurable but uncertain outcomes, or
lieu of promotions), or perceptual (widespread when it becomes overly difficult to measure those
recognition and approval by members of the outcomes? The only solution is to overcome the
organization). The effectiveness of these incen- moral hazards by building trust, commitment,
tives is said to vary depending upon the nature and effort among the agents who are, of course,
of the task, the needs of the individual, and the the stakeholders of the firm.
cohesion of the group. The process obviously
focuses on cooperative acts for which measurable Proposition 4 It is possible to build trust,
goals can be set, and is primarily designed for commitment and effort on the part of all
individuals and groups within the formal hierarchy of the stakeholders by including the ethical
who can legitimately be given commissions, principles in the strategic decision processes of
bonuses, promotions, or 'perks.' the firm.
Incentives to motivate creativity and improvi-
sation by individuals and groups outside the Trust is 'confidence in the honesty, integrity,
formal hierarchy of the firm seems seldom to reliability, justice of another person or thing'
have been considered in behavioral theory. Here (Webster, 1953: 1565). Trust in managerial terms
we have to move to the more general approach is confidence that the self-interests of the principal
of agency theory which can be applied to will not necessarily take total precedence over
any principal-agent relationship, including those the self-interests of the agent. Trust, again in
outside the hierarchical boundaries (Harris and managerial terms, is reliance upon the belief that
Raviv 1978, quoted in Eisenhardt, 1989). Agency when agents or stakeholders of the firm are to
theory is not limited to the special case of the be hurt or harmed in some way outside of their
owner/manager relationship. It can be and has own control, while others, often including the
been used to design governance mechanisms that owners and managers, are to be benefited, the
will limit any agent's self-serving behavior given decision will be made by applying the ethical
goal conflicts and varying levels of risk aversion, principles of analysis in addition to the more
task programmability, and outcome uncertainty, common microeconomic, industry organization,
exactly the issues we wish to address. and population ecology standards. The ethical
Principal-agent contracts can be based upon principles of analysis, of course, do address what
either behaviors or outcomes. Behaviors in the is 'right,' what is 'just,' and what is 'fair' in the
nonprogrammable tasks-i.e., those that involve critical relationships between the firm and its
a substantial degree of improvisation and various stakeholder groups, and were designed
Strategic Planning as if Ethics Mattered 29

to eliminate short-term self-interest as a decision mitment results in the cooperative and innovative
criteria by the representatives of the firm. effort that is so essential for success given
The basic argument of this article is that the intensely competitive nature of the global
decisions and actions by the managers of extended economy?
firms that (1) recognize the moral problems that Certainly there is very limited empirical support
occur when one or more of the stakeholders for this proposal. This lack of existent studies,
groups will be hurt or harmed in some way however, should not surprise us. The divergent
outside of their own control that; (2) resolve conceptual frameworks and the inherent concep-
those moral problems by applying the ethical tual misunderstandings of corporate strategy and
principles of analysis in addition to the more managerial ethics-both described earlier, in the
common strategic concepts of industry position, introduction to this article-have precluded the
competitive advantage, and organizational devel- joint work that might have been so useful. And
opment; and that (3) have the moral courage to managerial ethics, despite its applied nature, has
insist upon the recognition and resolution of remained normative, not descriptive, in most of
those problems, will result in trust amongst all its research and cannot provide the needed
of the stakeholder groups. Trust generates support by itself.
commitment. Commitment builds effort. Effort We all know of anecdotal examples that
that is cooperative, innovative and strategically seem to support the proposal that trust builds
directed results in success whether measured by commitment, particularly when the affected
stock price, market share, or organizational stakeholders are customers and/or employees.
development. Johnson and Johnson removed Tylenol from
In brief, an ethical approach to strategic store shelves nationwide at a cost of $80,000,000
management does not penalize the extended firm when it was feared that the product poisoning
in a competitive global economy. It benefits that might have spread beyond the original boundaries
company by ensuring a cooperative, innovative, of Chicago, and the company has benefited
and directed effort on the part of all of the extensively from consumer goodwill. Herman
stakeholders of the firm. Miller offered all employees a silver parachute
when it was feared that the company might be
the subject of a hostile take-over attempt, and
JUSTIFICATION OF THE ETHICS- worker morale has remained exceedingly high.
TRUST-COMMITMENT-EFFORT But, anecdotal evidence is not very compelling.
SEQUENCE Given the lack of large scale studies and the
unsatisfactory nature of most case examples, let
Why should this be so? Why should we accept us adopt a more conceptual approach. Let us
the proposal that the application of ethical return to agency theory, and the accepted
principles to strategic decisions builds stakeholder economic rationale of the principal-agent
trust, that stakeholder trust generates organiza- relationship.
tional commitment, and that organizational com- The economic rationale of the principle-agent

Recognition problems
__wa whatis "duty"

Corporate ~~~~~~~~~~~~~~~~
inExten t of moralreasoning
Application Commitment
Organizations whatis "right"? Effort

Possessionof moralcourage
'whatis "integrity"?

Figure 3. Building trust, commitment, and effort

30 L. T. Hosmer

relationship looks at each exchange as a new Numerous economists and sociologists have
event, unemcumbered by feelings of gratitude, questioned the microeconomic behavioral
indifference, disloyalty, or revenge. Any notion assumptions of short-term advantage and self-
of intended reciprocity for past benefits and/or interest maximization for either descriptive or
harms on the part of the agent is sternly predictive use. See, for example, the lengthy
excluded. Indeed, moral hazards-the lack of source listing in Sen (1991: 16f) that follows his
enthusiastic adherence to contractural classic statement, 'To try to use the demands of
agreements-are felt to be a problem only rationality in going to battle on behalf of the
for the agent, never for the principal, and standard behavioral assumption of economic
consequently acts on the part of the principal theory (to wit, actual self-interest maximization)
that might induce feelings of ingratitude, indif- is like leading a cavalry charge on a lame
ference, or 'getting even' on the part of the donkey'.
agent are thought not to occur. None of us want to lead such a cavalry charge.
What happens if we relax this requirement? What other behavioral assumptions are possible,
What happens if we accept the belief that then, following an overall belief in economic
contractural agreements between companies and rationality; that could be seen as including
stakeholders have both explicit and implicit knowledge by the agent about prior benefits and
terms, and that companies may only occasionally harms of the principal in the principal-agent
violate the explicit obligations but frequently contract that might influence the degree of
compromise the implicit understandings? An cooperation and the amount of innovation by
energetic marketing manager who has maintained the agent? There would seem to be three
sales for a mature product line is legally subject alternatives:
to employment 'at will,' but I think it is safe to 1. Multiple utilities. Etzioni (1988) is well known
assume that was not the impression given by for his amusing attacks upon the assumption of
the corporate recruiter 5 years previously. An short-term rationality and self-interested
innovative component supplier who has behavior. 'People typically do not render rational
developed a successful product feature for their decisions. They brush their teeth but do not
customer has no guarantee of future orders, but fasten their seat belts' (1988 : xi). Etzioni instead
I doubt that was clearly explained at the award suggests that decisions are based upon an I/We
ceremony honoring the supplier. dichotomy, with equal concerns for the person
What happens if the marketing manager sees and for the group. He terms the group half of
her friends and associates within the firm unjustly this dichotomy a deontological commitment, or
battered by corporate restructurings? What hap- moral sense of duty to others, and he recommends
pens if the component supplier sees other the use of dual utilities to encompass both the
suppliers unfairly given its drawings for the new personal and the moral sources of motivation.
product feature and asked to bid competitively? Etzioni has directly applied this concept of
Agency theory assumes that both will continue dual personal and moral interests to the issue
to work for the advantage of the principal, with which we are concerned here, that of
without any slackening of their energy and/or the principal-agent relationship, and finds that
innovation, because it is in their short-term self- concern for the good of the group and trust in
interest to do so as long as their behavior can be the reliability of the principle are both essential.
measured or their output can be evaluated. The 'Moral commitments reduce what economists
problem is seen to be in the measurement and have come to call moral hazards. Specifically,
evaluation procedures, and the need to make the stronger the moral underwriting of implicit
these more precise for unprogramed tasks and contracts, the lower the administrative costs
extended time frames. The problem is not resulting in less of a need to buy hedge protection'
thought to be in the microeconomic behavioral (1986: 175). It has to be admittted, however,
assumptions of short-term advantage and self- that the I/We paradigm proposed by Prof. Etzioni
interest maximization, which may be misleading has not gained wide support. Dual utilities are
given the lack of trust, commitment, and effort computationally complex, and the continual
that often come from acts that are felt by agents question arises: why stop at two? Why not add
to be 'unjust' or 'unfair.' affection, anger, conformity, homogeneity, or
Strategic Planning as if Ethics Mattered 31

others? Etzioni provides some support for the principal is essential for the cooperation and
importance of trust in principal-agent relation- innovation by the agent. However, we may be
ships with his concept of multiple utilities, but able to find an even simpler economic rationale.
perhaps we can go further. 3. Extended utilities. The standard economic
2. Interdependent utilities. Sen (1991) addresses rationale for the motivation of the agent in
the same personal vs. group concerns, and also principal-agent transactions is short-term advan-
writes with an amusing, elegant style, but he has tage or personal utility. Both Etzioni and Sen
less bite and more compassion for the problem object to the monolithic nature of this concept,
of developing an economic theory that is both but let us accept it for now with the proviso that
parsimonious and complete. He is a very dis- we extend the time frame through a series of
tinguished economist, which makes his beliefs infinite exchanges. That would seem to be a
more acceptable to that large part of the academic reasonable proviso. Energetic employees expect
spectrum, and he bases his arguments on rights to be employed not 'at will' but over time with
rather than duties which certainly appeals to some sense of gratitude by the company for the
many if not most of the ethicists. past market share achievements that were so
It is difficult to summarize this argument on beneficial. Innovative suppliers expect to receive
rights, but let me make the attempt. Sen starts additional orders not 'at cost,' but over time
by rejecting utility as a motivational means. 'It with some sense of appreciation for the past
is . . . arguable that since the claim of utility to product feature developments that were so
be the only source of value rests allegedly on helpful. These expectations of future benefits
identifying utility with well-being, it can be can obviously be discounted back by the agent
criticized both on the ground that well-being is to be added to his or her sense of current
not the only thing that is valuable, and on the advantage or utility.
ground that utility does not adequately represent What happens if the actions of the principal,
well-being' (1991: 46). in distributing the benefits and allocating the
Well-being is not the only thing that is valuable harms of company operations, destroys those
because people value the promotion of both expectations? The motivations of the agent
causes (rights, liberties, and opportunities) and towards cooperation and innovation will clearly
groups (families, communities, and classes). be decreased. Stakeholders expect 'right,' 'just'
Utility does not adequately represent well-being and 'fair' treatment, and those expectations can
because of the interpersonal comparisons that be destroyed by actions that are arbitrary or
are possible. You may have more than I do, or capricious, and that do not follow the known
your group may have more than my group, in principles of ethical analysis that tend to give
either advantage or freedom, and that affects the same consideration to the self-interests of
my conception of my goal, and my means of the agent as to the self-interests of the principal.
achieving that goal. I may, however, recognize Actions of the principal that give total weight to
that my achieving my complex goal is interde- their own short-term self-interests, and neglect
pendent with you achieving your complex goal those of the agent, would seem to destroy the
and therefore cooperation is essential. 'Behavior trust, commitment, and effort of the agent
is ultimately a social matter as well, and thinking through reducing the long-term utility of his or
in terms of what "we" should do, or what should her future cooperation and innovation.
be "our" strategy, may reflect a sense of identity In short, we can rationally justify the ethics-
involving recognition of other people's goals, trust-commitment-effort sequence if we first
and the mutual interdependencies involved' assume that principals in any principal/agent
(1991: 85). exchange occasionally act in ways that can be
If we accept Sen's argument that behavior is seen by the agents to be 'unjust' or 'unfair' and
socially motivated by a comparison of personal if we are willing to conceive of either multiple
utilities and a recognition of mutual interdepen- utilities, interdependent utilities, or extended
dencies, then we have a new and more compelling utilities. The latter, in my view, is computationally
reason to accept the proposal that the actions of most simple and logically follows most directly
the principal affect the behavior of the agent, from the accepted economic rationale of agency
and that trust in the mutual beneficiency of the theory.
32 L. T. Hosmer

CONCLUSION selection of a strategic posture within an industry

(Porter, 1980) and the leveraging of strategic
The basic argumentof this article-which is that resources across industries (Prahalad and Hamel,
the trust, commitmentand effort on the part of 1990) lead towards competitive and economic
all of the stake-holdersof a firm are as essential success. The argument here is that the selection
to the successof that firmas are the competitive of the posture and the leveraging of the resources
advantagesand strategicpositionsof its planning are not enough in a competitive global economy.
process-can be summarizedin a series of five Trust, commitment, and effort must be added to
statements: ensure cooperative and innovative acts on the
part of all of the stakeholders. The argument
1. The strategic decisions of any large scale here is that strategic planning must be both
economic enterprise in a competitive global analytical and ethical, which brings us back to
environmentresultin both benefitsand harms. the original views of Barnard, Simon, and
The harms, which include the discharge of Andrews.
employees, the terminationof suppliers, the
deteriorationof environments,etc. cannot be
avoided though until recentlythey have been ADDENDUM
2. It is the responsibilityof the senior executives A traditional objection by normative philosophers
of the firm to distribute those benefits and to the use of simplified ethical principles in the
allocate those harms among the stakeholders analysis of pragmatic moral problems is that
of the company.This can be done arbitrarily these principles, while ostensibly leading towards
or thoughtfully. If it is done thoughtfully, the betterment of society over the short-term, in
then the ethical principlesoffer the only form reality lead towards the betterment of the decision
of analysisthat is relevant. maker over the long-term. No one, to my
3. The ethical principlesoffer the only form of knowledge, has ever used the term 'heuristic' in
analysisthat is relevantfor the distributionof describing this view of the simplified ethical
benefits and the allocation of harms because principles, but that meaning is implied. 'You are
they provide the only means of recognizing unable,' the traditionalist philosopher would
the interests and rights of each of the state, 'to think through the full consequences of
stakeholders and comparing those interests your actions because you are unable to anticipate
andrightsthroughthe use of Knownprinciples. the full range of possible actions by others, and
4. Stakeholders who believe that the benefits therefore you are attempting to ensure their
have been distributedand the namesallocated future cooperation in your endeavors by recogniz-
througha process that recognizestheir inter- ing their self-interests now.' This, in the view of
ests and rights, and that compares those the traditional ethicist, negates those principles
interests and rights with those of other for it substitutes personal betterment for the
stakeholdersthroughthe use of known prin- common good. Perhaps, for the nontraditional
ciples, will develop trust in the direction of strategist, this verifies those principles for it
the firm. makes them heuristics, and very useful heuristics,
5. Stakeholderswho developtrustin the direction for strategic planning in an increasingly competi-
of the firm will show commitment to its tive global economy.
future. Commitmentto the future of a firm
will ensure efforts that are both cooperative
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