Why unethical conduct in business is so common at this time in our history? Why is business ethics almost irrelevant?

On By southwerkIn Business Ethics

Why unethical conduct in business is so common at this time in our history? Why is business ethics almost irrelevant?

It is now about four years since the catastrophe on Wall Street wrought destruction on this country’s economy. In those three years, the lives of much of the population have become much more difficult while the lives of those who created the disaster seem to have changed but little.

How did we get here? How did doing financial speculation amounting to little more than gambling become respectable? How did the idea of a responsibility to the other citizens of a nation become amusing to the elites?

There are several factors. The first was the advent of the baby boomers to power and authority replacing the Depression and the World War Two Generations. Probably the best date for this transfer would be 1976 when Jimmy Carter became President. He was the first President to not have served in the Second World War since Truman. The significance of this was huge. The previous generation had solid memories of the failures of financial sector and the long hard times that resulted. The difference between study and experience are dramatic. It’s even worse when it’s collective experience. The new generation had stories, movies and television to remind them of the pain of those years, but it didn’t carry the power of the emotions involved, the collective helplessness of more than fifteen years when everything that generation knew was in peril.

The second factor I point to is the advent of the Chicago School of Economics and the doctrines of Milton Friedman. I point in particular to Friedman’s 1970 article in the New York Times Magazine, The Social Responsibility of Business is to Increase its Profits. This is my favorite quote.

But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

I want you to understand that it appears to me that included in “the doctrine of social responsibility” is duty, honor, religion and patriotism, to name a few. (I like to tell my ethics class that the no religion agrees with this doctrine that doesn’t practice human sacrifice.) Here we have a rejection of those values that constitute Western Civilization. From Wikipedia:

The concept of western culture is generally linked to the classical definition of the Western world. In this definition, Western culture is the set of literary, scientific, political, artistic and philosophical principles which set it apart from other civilizations. Much of this set of traditions and knowledge is collected in the Western canon.

These things that make us human, these things that convey the values – the principles, that are the result of thousands of years of human experience are swept away in a simple doctrine that justifies any action within “the rules of the game.”

I want to point out one more thing: notice that the principles of “within the rules of the game” and “open and free competition without deception or fraud” are in many ways contradictory. If you can make or influence the rules why should you compete? Now get a load of this: Friedman tells businessmen that they are free of any restraint, every limitation of conduct, but they are supposed to hold to the duty of engaging in open and free competition without deception or fraud: Do whatever is necessary to make a profit but be good boys and compete.

The third element is the gradually increasing wave of deregulation which begins in a small way in 1971 when the Nixon Administration recommends the rail and trucking industries be deregulated. By the time, Jimmy Carter is elected the doctrine has gained enormous strength and much wider application. The basic implication that government regulation damages business success hampered any attempt at new regulation no matter what happened. This attitude is critical to what happens next.

The fourth element can be dated roughly as beginning 1981. Hostile takeovers and corporate raiding become regular parts of the business news. The basic significance of this is that it is a war. A war fought between manufacturing and finance, with manufacturing losing at every turn. The secondary effects were only a little less worse. You could make money at it. Not little money like people made from developing new products and making things, big money. T. Boone Pickens, one of the major corporate raiders of the period is worth three billion dollars and is rated currently as the 117th richest man in the world. Now let us add in a related development, the financing of these takeovers. Drexel Burnham Lambert paid Michael Milken 550 million dollars a year during its heyday. What did Michael Milken do to merit this: he created high yield bonds, junk bonds. The era of “financial innovation” begins here. Continuing to the present day, more and more bizarre mathematical creations will be used for investment, financing and speculation.

Now, let’s combine them. Those Americans familiar with the pain of the results pass on the reins of power to a new generation. The Chicago School of Economics will provide the philosophical basis for discarding societal responsibility. The government reacts with deregulation which makes it exceptionally difficult to re-regulate industries. The financial industry begins destroying manufacturing in its search for profits.

All the elements are now in place for what has happened and continues to happen. The American population without previous experience of the fruits of financial speculation have no common idea of what should be done. The ethic of the business world is converted from a complex set of factors motivated by religion, philosophy, the myriad other factors that tie us to one another as a people to one of profit as the only value. The government accepts this philosophy and applies it, making deregulation and not regulating pretty much the official doctrine of the government. The financial industry begins destroying healthy companies making hundreds of millions of dollars for what might kindly be described as little effort. The government does not intervene to stop this, which is a clear demarcation line in history that the power of that part of American that makes things is eclipsed by the power of the deal makers, the part of American society that moves money.

Out of this history we grew a generation of Americans who knew with certainty (and unfortunately with accuracy) that going into the financial industry, taking risks, and pushing the boundaries of the rules could make one a multi-millionaire in short order. The most capable of the students at the great universities many of them Ivy League schools went into finance. Those individuals were supposed to be a wide variety of things especially the keepers of the flame, the torch that is passed from one generation to another, the moral standards, the courage, the willingness to sacrifice for their country and their fellow man so that all can prosper. It is difficult to maintain a system of morals when the rewards are so extreme. My understanding is that ivy leaguers can start at a Wall Street firm for as much as $350,000 in salary. And after that if you are willing to do “what it takes,” the path to being a mere millionaire is quick and easy. These people were supposed to be crusading attorneys, publishers, politicians, administrators – all those things that make societies function. There is an ancient precept that nations succeed based on the wisdom of the learned, the courage of their soldiers and the efforts of the workers. Our best and brightest don’t go there. They go to make money in a moral vacuum.

We are going to pay for this for a long time. When the basic doctrine, the ethos of a country becomes devoted to the acquisition of wealth with not even a tiny lip service to virtue you get unethical conduct on a broad front across the business world. Everything that has happened since then, has grown out of these events that I described. The Savings and Loan Etc. (I was going to list them but you know as well as I do what they are and I find it too depressing to make such a list just at the moment) are all explainable out of these elements.

Now we have the demonstrations on Wall Street that are rapidly forming a counterpoint to the story,  I told above.

Is this the beginning of a brand new story or a small and insignificant chapter in the global rise of financialization?

I am hoping for a new story.

James Pilant

From around the web.

From the web site, 3M Health Information Systems.

http://3mhealthinformation.wordpress.com/2013/07/24/why-unethical-behavior-goes-unchecked/

I’m interested in why people don’t report to their companies if they observe unethical, illegal, or just wrong behavior. Most large companies provide training on their Code of Conduct, ethics, legal issues, and harassment. Is it that it takes effort and a bit of risk in order to report someone else’s wrongdoing? That appears to be case. In the same survey mentioned above, they found that 69 percent of respondents thought the company would not investigate the issue properly if it was reported and 23 percent feared a negative consequence, including retaliation. It appears that more training on the topic of reporting suspected wrongdoing is needed as well as efforts within companies to honor their commitments to address any report of suspected wrongdoing and keep the employee safe from harm.

Who is in a position to help companies promote more reporting of misconduct? Once again, I think the middle manager is the key to the solution. Middle managers are well positioned to see what happens with those who report to them as well as what happens with their own senior managers. Their perspective within the organization cannot be matched. Additionally, the middle manager often has sufficient information about the company and its policies to know when the issue is bad behavior or an honest mistake versus unethical or illegal actions. Encouraging employees to report directly to their manager (when the issue does not include their manager) may help to weed out the misunderstandings from the misconduct and do so at a level that feels safer to the employee.

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