By Steve Mintz on December 2, 2011
It is quite popular these days to reflect on whether capitalism as an economic system does more harm than good. Critics of capitalism, such as those in the “Occupy Wall Street” movement, claim that the actions of corporate America and Wall Street investment firms contributed to the financial meltdown in 2008 that still affects our ability to recover economically. I previously wrote about corporate greed when I supported the OWS movement in an opinion editorial in the Business Times on Oct. 21.
Can capitalism be an ethical system that promotes economic growth and improves the economic standing of all in society? In other words, can the actions of the top executives of a corporation lead to the maximization of shareholder wealth and at the same time provide a “trickle down” to benefit all of society?
It is important to remember that Adam Smith connected ethics to economics. Smith came to his philosophy of economic behavior described in “The Wealth of Nations” through his view of moral behavior espoused in his first book, “The Theory of Moral Sentiments.” Smith, who is generally regarded to be the founder of free-market economics, posited that rational self-interest informed by moral judgments based on fairness and justice would lead to promoting the best interests of society guided by the invisible hand of the marketplace.
I believe that what is missing from business today is ethical decision making. We must ask: What are the rights of shareholders and other stakeholders, including employees, customers, suppliers and the general public, and what are the obligations of CEOs and boards of directors to these parties? The nature of the present economic crisis illustrates the need for departures from uncontrolled self-dealing for the good of society. Smith had a diagnosis for this: He called such promoters of excessive risk “prodigals and projectors,” an appropriate description of many of the promoters of credit default swaps and sub-prime mortgages in the recent past.
Yet, more government regulation is not the answer. The fact is we cannot regulate ethical behavior. It comes from within each one of us as individuals and corporate managers who are supposed to act as agents for shareholders.
The Josephson Institute of Ethics identifies six pillars of character. I believe there are Six Pillars of Ethical Capitalism:
• Honesty: Do not lie or deceive stakeholders in conducting business operations. Fully disclose all the information that stakeholders have a right to know.
• Trustworthiness: Act in a reliable manner by exercising diligence in business decision making. Be consistent and dependable in word and deed.
• Fairness: Judge performance in the workplace in an unbiased manner. Act in accordance with established standards of behavior (i.e. a code of conduct).
• Integrity: Keep promises and carry through decisions with ethical action. Act to prevent improper behavior or to stop it once it has been detected.
• Responsibility: Meet obligations to stakeholders. Accept the consequences of decisions and act to improve corporate behavior.
• Civic virtue: Follow the laws and customs of society. Act in a socially responsible manner.
It has been more than 40 years since Milton Friedman proclaimed in his in seminal piece, “The Social Responsibility of Business Is to Increase Profits,” that any businessman who thinks a corporation should take “seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else” was “preaching pure an unadulterated socialism.” I suppose this is the basis for criticisms by Republicans of the OWS movement. Friedman later wrote in his book “Capitalism and Freedom” that in society, “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
This is precisely the problem. Fraud has been rampant in corporate America for years, from the late 1980s and the failure of 1,043 savings and loan institutions, to the late 1990s and early 2000s, when massive accounting frauds at Enron, WorldCom and dozens more wiped out hundreds of billions of dollars in corporate assets, shareholder and personal wealth. Just a few years later the financial system collapsed under the weight of actions that were designed to enrich the few at the cost of the many 99 percenters.
We have lost our moral compass, and nowhere is this more apparent than in corporate America. Ethical standards are set aside for the pursuit of self-interest. Reliable financial reporting is lost in the fog of misinformation.
The answer to our national dilemma is to first agree on what the standards of behavior for corporations are. I don’t mean corporations as entities; instead, my standards apply to the managers of such businesses. It is with this goal in mind that I submit my “Six Pillars of Corporate Character.”
• Steve Mintz is a professor of accounting in the Orfalea College of Business at Cal Poly San Luis Obispo. He blogs about business issues at www.ethicssage.com and www.workplaceethicsadvice.com.