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Op/ed: Is ‘ethical capitalism’ an oxymoron?

By   /   Friday, December 2nd, 2011  /   6 Comments

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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.

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6 Comments

  1. Steven Mintz says:

    Many believe we need to get government out of the way of big business and everything will be rosy down the line for America. Your suggestions do not address the root cause of the problem today, as I see it, which is unethical conduct by all too many in corporate America that costs investors and the public billions each year. The latest example is MF Global. I mention many others in my opinion editorial. The vast majority of businesses, including small businesses, act ethically. Like so many things in life, it is the acts of a few that affect the many an nowhere is this more true than in regulating business – i.e. discrimination, sexual harassment, environmental policies, and so on. We need to open a dialogue on how to rediscover what Adam Smith wrote about years ago with respect to the moral base of capitalism. Perhaps Gandhi said it best: “Capitalism as such is not evil; it is its wrong use that is evil.”

  2. brucebell says:

    Several problems:
    (1) what we have now is crony capitalism, big government in bed with big corporations
    (2) SEC ignore 30,000 shareholders who wrote in 2007 to try to have a save in who would be on their boards of directors
    (3) SEC ignored several SEC employees who knew Madoff problems for years
    (4) TARP bailout ($700B) of too large to fail banks, topped by Federal Reserve $7.7 trillion commitment to banks.
    (5) Coprorations do not want capitalism and a level playing field, e.g. if individuals had same health insurance deductibility, 25% of employees would start their own businesses.
    Solution is to get the government out of “capitalism”
    Bruce Bell, Moorpark, CA

  3. Steven Mintz says:

    Thanks for your thoughtful comments, Hanlen. I agree regulations are required for two reasons: (1) to set legal standards of behavior and (2) to provide a mechanism to punish those who violate the laws. However, this still doesn’t solve the problem that unless the behavior of corporate managers changes from the one-sided pursuit of self-interest to a balance between self-interest and societal interests (i.e.: What is the public interest?), then I’m afraid the laws will always play catch-up with the “promoters of excessive risk.”

  4. Hanlen Chang says:

    I do not believe that ethical capitalism is necessarily an oxymoron. Capitalism is just another word for free enterprise. However, like in any endeavor, there will always be bad actors.This is especially the case in bigger countries where accountability is less likely and profit from “one time fraud of many individials” highly profitable. There is inherently a certain level of bad actors, irrespective of criminal context, otherwise why have a police force?

    In terms of corprote self-interest, an easily recognizable fault line is long term interest v. short term interest. Anyone with long term interest cares about their reputation and wants repeat business. Those with short term interest are much more likey to behave unethically.

    The solution to fraud is properly tailored regulations that discourage short term business profit models, subjecting the corporations to legal liability (including punitive damages), and tougher criminal prosection of white collar crime.

  5. Steven Mintz says:

    Quite right, Randy. I am concerned about the Groupon situation and even the pending IPO by Facebook with respect to its financial information. The accuracy and reliability of financial statement information is an integral part of our capitalistic ethic but in the recent past we have fallen short of this goal. I am not convinced the regulators (i.e., SEC) are watching closely enough given its previous failures.

  6. Randy J. Munoz says:

    “Six Pillars of Corporate Character” is a great start. Fraud is rampant inside many corporations including the technology sector. As the author of this article is an accounting professor, I am certain that he understands the markets better than myself so I am sure he would agree that this current offering of IPO’s in the tech sector may be in some trouble because of accounting irregularities or as the former CFO of Enron calls it, aggressive accounting. I believe that corporations and their CEO’s must walk a fine line of balance in their responsibilities toward their employees and their stockholders. Of course, to create the perception of value they must show growth and some times the unethical CEO or CFO with cooperation from other executives, will fudge the numbers. Take for instance “Groupon” as an example. In preparation for their IPO, the CEO Andrew Mason wanting to show growth and the perception of profits, tried an accounting proceedure that hid expenses to inflate the profit line numbers. With rampant negative information about Groupon’s ability to retain their core of customers and commercial acceptance of their product waning, the question of actual value was variable.

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