Where Morals and Profits Meet:
The Corporate Value Shift
Although recent headlines focus on business boondoggles, HBS professor Lynn S. Paine's research shows a rising standard of corporate performance that includes moral and financial dimensions. In an interview, she details this trend and her new book, Value Shift.
Editor's Note— Harvard Business School professor Lynn S. Paine's new book, Value Shift, argues that companies can't consider themselves amoral or apart from society anymore—that the relationship between companies and society at large necessitates bringing a moral dimension to decision making. In this interview with HBS Working Knowledge's Carla Tishler, Paine explains why this shift has occurred, and why now.
Tishler: Your research on corporate values and ethics dates back to the 1980s, including much work done for Harvard Business School cases. Clearly, business ethics issues have been around a long time. Do you see a marked difference in the types and degrees of ethical breaches occurring in the past, compared to more recently?
Paine: Business ethics, of course, is as old as business itself, but formal academic study of the subject is, as your question suggests, comparatively new. When I began working in this area, the field was just beginning to emerge. At the time, corporations were being taken to task for a host of moral failings—neglecting consumer and employee safety, ignoring civil rights, polluting the environment, violating election laws, misleading investors.
The 1970s, much like the period we are in today, had witnessed a dramatic loss of confidence in business and American institutions more generally. In 1968, 70 percent of the public thought business tried to strike a fair balance between profits and the public interest. By 1977, the proportion was something like 15 percent. The overseas payments scandal was another contributor to the malaise. More than 400 major U.S. companies had admitted to making illegal campaign contributions and bribing public officials to win business overseas.
Given the field's origins in these events, people sometimes forget that business ethics at its core is about excellence and high attainment rather than misdeeds and malfeasance. But we do pay attention to misconduct, and I have seen many types over the years—from the garden-variety deceptions and betrayals that sap morale and waste human energy to the serious forms of wrongdoing that destroy health, wealth, and life itself.
The issues span the ethical spectrum: falsified books and records, misleading communications, defective and dangerous products shipped without warnings or information, abusive behavior and unsafe conditions in the workplace, unwarranted favoritism and conflicts of interest, myriad examples of bribery and extortion, unfair and predatory competition, theft and misappropriation of information, civic and environmental irresponsibility.
Unfortunately, we have no reliable gauge of how the levels and types of misconduct have changed over time. One reason for this, as I note in the book, is that expectations for corporate behavior are constantly evolving. Conduct that would have been ethically acceptable in one era becomes unacceptable as expectations rise.
People sometimes forget that business ethics at its core is about excellence and high attainment rather than misdeeds and malfeasance.
— Lynn S. Paine
Moreover, new issues are constantly coming to the fore as a result of changes in technology, society, and politics. For instance, data privacy was not a major issue until the late 1980s and 1990s when companies began to exploit newly available information technologies. Recent advances in biotechnology have raised ethical issues that have never before presented themselves. And globalization has given rise to cross-cultural dilemmas that just weren't a major part of the scene in the 1970s.
Q: You note in your book that many companies are making a "turn to values,"—focusing on ethics, values, and examining company culture—but for varied reasons including risk management, organizational functioning, market positioning, and civic positioning. In your view, do you expect to see more companies follow one of these four routes more than the others? Does there always have to be a corporate justification? Will we see any trends?
A: As I describe in the book, the paths to values are many and varied. Some managers arrive by way of a crisis or scandal, and others by way of personal conviction or a logical process of reasoning and analysis. And a few are motivated simply by the vision of a better and more humane way of conducting business.
Overall, though, my experience has been that probably half, and maybe even two-thirds, categorize ethics mainly as a risk management issue. These managers tend to see corporate values as a tool for preventing misconduct with its incident legal, financial, and reputational risks. Ethics gets their attention because they want to avoid the high-profile missteps and billion-dollar losses experienced by a Salomon Brothers, Bridgestone/Firestone, or Enron.
In the future, I think more managers will recognize that risk management is only part of the story and that the benefits of positive values go well beyond problem avoidance.
— Lynn S. Paine
In recent years, however, I have seen more attention being paid to the positive side of ethics. More managers are waking up to the ways in which positive values contribute to a company's effective day-to-day functioning, as well as its reputation and long-term sustainability. In the book, I trace these connections in some detail and show how they play out in practice—sometimes in surprising ways.
In the future, I think more managers will recognize that risk management is only part of the story and that the benefits of positive values go well beyond problem avoidance. I have seen this progression in some companies that initially turn to values as a damage control measure when confronted with a scandal in their organization or industry. Then, over time, they come to take a broader view as they see the positive effects on work life, product quality, relationships with their constituencies, or their standing in the community.
Q: Having a positive value system in place can help contain costs by heading off trouble. But can improved values also add to the bottom line?
A: I've alluded to some of the ways positive values can add to the bottom line. And research points to others that I discuss in the book—better access to talent, enhanced employee commitment, better information sharing, greater creativity, enhanced reputation, and so on.
But I caution managers against focusing only on the financial case for values. No matter how much evidence we amass for this case, the fact remains that moral indifference and even blatantly unethical behavior can also be financially rewarding in many circumstances. We should not forget that slavery had its financial benefits for slave owners. And, in virtually every case of misconduct that I've studied, the perpetrators justified their actions by reference to the anticipated financial gains.
What's important to recognize, as I argue in the book, is that today's companies are being held to a higher standard. Financial results are a must, but in addition, leading companies are expected to achieve those results by acting in an ethically acceptable manner. This represents a dramatic departure from centuries of tradition holding that corporations are by nature amoral and thus incapable of assuming responsibility, adhering to ethical standards, or exercising moral judgment. But abundant evidence shows that companies today are expected to do all these things.
In every region I've studied, I've found business leaders who are trying to develop companies that meld high ethical standards with outstanding financial results.
— Lynn S. Paine
This shift in our understanding of the corporate personality has profound implications for management. Among other things, it means that managers must develop more robust ethical reasoning skills and increasingly subject their decisions to ethical as well as financial analysis. In a world in which companies are expected to behave as moral actors that conform their activities to certain ethical requirements, financial tests of acceptability alone are insufficient.
In the book, I spell out the implications of this shift in some detail and show how companies can become what I term "center-driven"—oriented toward strategies that make both ethical and financial sense. In the schema I lay out, companies can choose to be "dues payers" that practice an ethic of compliance, "sustaining members" that practice an ethic of mutuality, or "sponsoring members" that practice an ethic of contribution. But, as a practical matter, they can no longer choose ethical indifference as orthodox corporate theory has long maintained.
Q: What about the global picture? Are there other countries setting good examples for American firms to follow? Are there some places where the turn to values will be particularly difficult?
A: One of the most rewarding aspects of my research in recent years has been learning about well-regarded companies in all parts of the world. In every region I've studied, I've found business leaders who are trying to develop companies that meld high ethical standards with outstanding financial results. Generally, these are companies that seek to do an excellent job serving their core constituencies, including investors, customers, employees, and the public.
This is an inherently challenging task in any country, but it is more difficult in some environments than others, particularly those plagued by high levels of corruption. The effects of corruption are insidious and they go well beyond requests for bribes and favors. Obviously, the economic implications can be significant when your competitors can get away with paying off officials—either public or corporate—to win major contracts or secure exemptions from health, safety, or other requirements.
On the other hand, a background of corruption can sometimes make it easier for a good company to stand out. The story of Nigeria's Guaranty Trust Bank, which I recount in the book, provides a nice example. Given that studies have consistently found Nigeria to be among the world's most corrupt countries, it would not appear, at least initially, to be a very promising venue for a values-based company. But, for this very reason, GTB's founders felt it was imperative to try. They set out to build a bank that would be known for its workplace innovations, outstanding customer service, superior financial results, and exemplary corporate citizenship.
In general, though, it is easier to meld ethical commitment and economic success in environments where information is free-flowing and people have real choices about where to work, invest, and consume. Of course, people can only make sound choices if they are educated and have ongoing access to relevant information. So an educated populace and a free press are also important. In addition, a well-understood ethical framework and an effective legal system are crucial. In other words, it is very hard to talk about corporate ethics without paying attention to the broader social and institutional context in which a company is operating.
Q: What other projects are you working on?
A: As I note in the preface, Value Shift raises many more questions than it answers. So there are several directions I am considering for my next project. But, for now, the general idea is to go more deeply into the cross-cultural issues you just asked about.
For the past few years I have been developing a course on cross-cultural management for the second-year MBA program. While this project has persuaded me that leading companies around the world are gravitating toward a set of what might be termed "generally accepted ethical principles," it has also persuaded me that cultural differences present some formidable challenges for companies and their managers.
In my next project, I hope to shed some light on this murky area and also to help fill a gap in our curriculum. Historically, cultural issues have not had a central place in management education, but given the world today—and the role of business in it—familiarity with these issues has become essential preparation for business leadership.
1. "The Millennium Poll on Corporate Social Responsibility," executive briefing, conducted by Environics International, Ltd., in cooperation with the Prince of Wales Business Leaders Forum and the Conference Board, 1999, PDF File (March 5, 2002).
3. As quoted in Christopher D. Stone, Where the Law Ends: The Social Control of Corporate Behavior, 2d ed. (New York, N.Y.: Harper & Row Publishers, 1975), p. 3. A slightly different version is quoted and attributed to Edward, First Baron Thurlow (1731-1806), Lord Chancellor of England, in John C. Coffee, Jr., "'No Soul to Damn: No Body to Kick': An Unscandalized Inquiry into the Problem of Corporate Punishment," Michigan Law Review, vol. 79 (January 1981), p. 386: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?"
4. In The Case of Sutton's Hospital, Sir Edward Coke (1552-1634) wrote, "They [corporations] cannot commit treason, nor be outlawed nor excommunicate, for they have no souls." 10 Coke Report 1a, 77 Eng. Rep. 937 (Exchequer Chamber, 1613).
6. See John Dewey, "The Historic Background of Corporate Legal Personality," Yale Law Journal, vol. XXXV no. 6 (April 1926), pp. 655-673, at 665. For challenges to this attribution, see sources cited in William W. Bratton, Jr., "The New Economic Theory of the Firm: Critical Perspectives from History," Stanford Law Review, vol. 41 (July 1989), pp. 1471-1527 at note 151.
9. Joseph S. Davis, Essays in the Earlier History of American Corporations (Cambridge, Mass.: Harvard University Press, 1917), II, 8, 22, quoted in Oscar Handlin and Mary F. Handlin, "Origins of the American Business Corporation," Journal of Economic History, vol. 5, no. 1 (May 1945), pp. 1-23 at p. 4. Another historian puts the number of special charters creating corporations in the states during the period 1780-1801 at 317, 96 percent of which were of the public-interest variety. See James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780-1970 (Charlottesville, Va.: The University Press of Virginia, 1970), p. 17.
10. By the end of the nineteenth century, limited liability had come to be seen as an essential attribute of the corporate form. On the origins of limited liability, see Handlin and Handlin, "Origins of the American Business Corporation," pp. 8-17.
11. Bank of the United States v. Deveaux, 9 U.S. (5 Cranch) 61 at 86 (1809). This case was subsequently overruled and the corporation deemed in law a citizen of the state that created it. See Louisville, Cincinnati & Charleston Railroad v. Letson, 43 U.S. (2 How.) 497 at 557-558 (1844). For discussion of this development, see Herbert Hovenkamp, "The Classical Corporation in American Legal Thought," 76 Georgetown Law Journal 1593 (June 1988) at 1598-1599.
12. For a detailed discussion and analysis, see Morton J. Horwitz, "Santa Clara Revisited: The Development of Corporate Theory" Chap. 3 in The Transformation of American Law 1870-1960 (New York, N.Y.: Oxford University Press, 1992), pp. 65-107. For the story of the parallel development in England, see Hunt, Development of the Business Corporation in England.
17. The subject of the corporation's moral personality is broached in a 1903 lecture by Frederic William Maitland, "Moral Personality and Legal Personality," which appears in The Collected Papers of Frederic William Maitland, vol. III, ed. H. A. L. Fisher (Buffalo, N.Y.: William S. Hein & Company, 1981), pp. 304-320.
18. For an effort to sort out the morass, see Dewey, "Historic Background of Corporate Legal Personality," pp. 655-673. See also Max Radin, "The Endless Problem of Corporate Personality" Columbia Law Review, vol. 32 (1932), pp. 643-667.
24. For an account of the corporate responsibility debate of the 1970s, see Fred D. Baldwin, Conflicting Interests: Corporate-Governance Controversies (Lexington, Mass.: D.C. Heath and Company, 1984).
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