The Ethical Principles of Business

First Published: 2020-09-20

by Maurice Marwood

The reason that a person should exercise integrity is the same reason that he needs to adhere to rational principles in the first place. Irrational action works against his life. Only the consistent loyalty to rational principles that integrity prescribes enables a person to reap the rewards of the other virtues and to achieve objective values. Breaches of integrity defeat a person’s purpose of achieving his happiness

         Tara Smith

While working and traveling in the international business community, I encountered a wide variety of cultures and beliefs that produced a similarly wide variety of conflicting ethical standards and behaviors. I was determined to understand, to reconcile, and to deal with these diverse standards in a way that would be most beneficial to both the organization and to me.

In North America, a significant industry has developed around corporate social responsibility—consulting firms, conferences, magazines, and scholarly journals. Awards have been offered to companies exhibiting the best “corporate conscience.” Many large companies now have Corporate Ethics Officers, and there is an Ethics & Compliance Officer Association (ECOA). There is no doubt that the role that business plays in society has become an ethical issue, and there are frequent debates about what that role should be. Often these debates suggest that the choice is simply one between money and morality—as if they were mutually exclusive.

First Ethical Principle

It seems to me that the first ethical principle of business is to survive, to maximize the long-term value of the firm to its owners. Without survival, the subject of business ethics becomes irrelevant. Long-term survival can only be achieved by focusing on profit (the lifeblood of a business), by being a good corporate citizen, by making choices that benefit customers and other stakeholders, and by practicing ordinary decency and building trust through honesty and fairness.

Unfortunately, the public often embraces an anti-business mentality, and blindly accepts that any pursuit of profit is evil. In fact, the profit motive is a highly moral imperative for success and economic well-being. Long-term profitability requires honesty and integrity; practicing fraud destroys a company’s value. To succeed, businesses must offer high-quality products, not shoddy goods; they must maintain a reputation for fair dealing and maintain accurate accounting statements; otherwise, they lose the trust of the bankers, the credit rating agencies, and the investing public. Even suspicions of wrongdoing can destroy a company’s stock price and, therefore, its ability to borrow money.

Creating wealth requires offering goods and services that satisfy customers’ demand for value. The profit motive has given us cheaper, safer, and better products. Most business leaders—just like their employees—strive to earn honest profits as they work for their own rational self-interest. They should be rewarded for their success, not condemned. Defend the profit motive and your rights as a businessperson and do not accept an unearned guilt.

Second Ethical Principle

The second ethical principle of business is to balance the pursuit of profit with social responsibility. It is not a matter of focusing on one to the detriment of the other—the two are not mutually exclusive, although, without profitability, it is not possible to practice much social responsibility for very long. My experiences have convinced me that doing productive work that improves the human condition is the best way to practice social responsibility. By that, I mean doing work that, in the end, improves the lives of people who, in the 17th-century words of Thomas Hobbs, can anticipate a life that is “poor, nasty, brutish and short.” How does business contribute?

The first and perhaps the most important contribution is the work the products do. One of the greatest rewards of my life has been playing a small part in projects that contribute to economic development throughout the world. Examples include the construction of roads, airports, railways, canals, dams, reservoirs, levees, sewers, and waterways; the development of sites for homes, factories, and stores; the clearing, forming, and terracing of land; the production and harvesting of crops; the excavating of coal and ore; the reclaiming of wastelands for useful purposes; the exploring for oil and gas; the constructing of pipelines; the disposal of waste materials; and the supplying of power for trucks, boats, industrial equipment, hospitals, and factories. Such work improves living standards and quality of life throughout the world. Developing countries always benefit the most from these projects—if their leaders care about the welfare of the people.

The second way in which business contributes to social responsibility is by providing employment, and by establishing manufacturing facilities and marketing organizations in the various geographical areas they serve. Caterpillar’s products and components are manufactured in 50 facilities in the United States and over 50 other locations. Caterpillar has had a presence in over 40 countries around the globe. Each of its facilities has generated significant employment opportunities for the local people so that they could look forward to improving their “poor, nasty, brutish and short” lives. Contrary to media reports, these facilities did not displace manufacturing capacity in the United States; quite the opposite—they strengthened market position and captured new business in new locations that would not have otherwise been available. Besides, in almost every instance, they stimulated exports from the United States.

Take China as an example. Caterpillar sold its first product to China in 1975, and shortly thereafter, I roamed the country helping to provide service support to our customers. Local production began in the early 1990s, and subsequently, several joint ventures and wholly-owned facilities were established in China, together with a network of independent dealers. For several decades, exports to China have increased, and, as a result, thousands of new production jobs were created in the United States, making a major contribution to the health and strength of the U.S. economy.

The third contribution business makes to social responsibility is transferring and sharing technology. Each time a new facility is established somewhere in the world, a certain amount of technology transfer and information sharing takes place. Caterpillar first launched technology transfer agreements with the Chinese in the 1980s, at which time the Chinese began building licensed products. Technology transfers help people help themselves, which they must ultimately do to climb up the economic ladder and out of their poverty and attendant illiteracy. For decades, Caterpillar and many other companies have shared their technology related to management, product design, application, service support, and a variety of other business functions with many countries.

Those are the predominant ways in which business fulfills its social responsibility and helps millions of people participate in the global economy and acquire jobs, knowledge, and a better quality of life. Since the beginning of the Industrial Revolution, businesses have been the primary engine driving the improvement of the human condition.

Third Ethical Principle

The third ethical principle of business deals with integrity. In our Western culture, rewards offered after services have been provided are generally considered gratuities; they are characterized as appreciation for services already rendered. On the other hand, rewards offered before the services are provided are often considered bribes, a form of corruption; they are characterized as payments to influence preferential treatment in the future.

According to these definitions, the timing of the payment is the main characteristic that distinguishes between what is ethical and unethical. Others believe the form of the payment is the most important distinguishing characteristic, arguing that paying for entertainment is okay, but just handing over money is not. Some believe the amount of payment is an important distinguishing characteristic.

I found all these definitions to be oversimplified and have come to believe that several factors must be considered together and that the deciding factors—not always easy to evaluate—are whether the transaction violates the rights of other parties not involved in the transaction, and/or whether anyone has been unfairly disadvantaged.

Code of Conduct

Most large companies have attempted to deal with the ambiguity by publishing a code of conduct. Caterpillar was one of the first companies to define a corporate ethics policy in a Code of Conduct as early as 1974 and, over the years, has established an enviable reputation for ethical behavior. Rather than merely being a broad philosophical statement of little practical value, the Caterpillar Code acknowledged global reality and addressed ethical issues encountered in day-to-day business activities. It included statements like:

We will keep our word. We won’t promise more than we can reasonably expect to deliver; nor will we make commitments we don’t intend to keep. We won’t seek to influence sales […] by payment of bribes, kickbacks, or other questionable inducements.

Caterpillar’s Code also discussed the involvement of people in decisions affecting their work; aspiring to high standards in human relationships; stewardship of the Board; protection of the environment; relationships with suppliers, dealers, and public officials; financial reporting; inter-company pricing; public responsibility; and a variety of other ethical issues. The Code was written to accommodate those differing business practices without compromising its basic principles and recognized that there is not necessarily “one best way” because different cultures hold varying views about practices related to dealing with competition, information disclosure, international mergers, inter-company pricing, safety standards, intellectual property and trademark protection, and so on.

Occasionally, difficulties arose during normal commercial transactions and routine dealings with public officials. For example, while passing through immigration at certain emerging nations, passports would occasionally disappear until a gratuity was paid to expedite them through the immigration approval process. The Code strictly forbid us to pay (that is, bribe) public officials to avoid doing what they were expected to do; however, payments of “customary amounts” were permitted to “facilitate the correct performance of the officials’ duties” when deemed unavoidable. Paying a reasonable “gratuity” to an immigration official was not considered a violation, because the payment was to facilitate the performance of their official duties. However, one could debate the virtue of the immigration official who demanded a gratuity.

It was not uncommon to encountered intermediaries (consultants or brokers) who routinely handled the procurement of goods and services for government entities. If these intermediaries were not hired to facilitate commissions (kickbacks) to the purchaser, their role was otherwise difficult to explain. The intermediaries could usually issue an invoice to show transparency when scrutinized by the auditors. Few experienced people are fooled in such situations if the invoice exceeds what would be considered a reasonable amount for the “services rendered”; but then, what consultant/auditor is going to accuse another consultant of fraud merely because they charged “too much” for their services?

It is quite common in many industries to entertain important customers on expense-paid trips to sporting and other events, and I have participated in several. They are generally considered good public relations and rewards for customer loyalty; however, they are also invariably expected to influence preferential treatment when future procurement decisions were made—often called customer retention programs. In these situations, I asked myself, “Was anyone’s rights violated, and was anyone unfairly disadvantaged?”

I have listened to many self-righteous western businesspeople condemn foreign practices that on the surface were essentially the same as North American practices, except the rewards may be in the form of a gift or money rather than entertainment at sporting events. Cultural norms often determine whether a particular behavior is considered bribery and corruption, or simply customary practice in appreciation for customer loyalty and cooperation. The difference between a gratuity and a bribe is often ambiguous, and one’s judgment usually depends on the cultural perspective of the beholder.

Globalization produced some lively debates about corporate ethics. For example, is it sufficient that businesses meet local laws regarding safety and environmental standards if they are lower than are those in more developed countries? The explosion at the Union Carbide plant in Bhopal, India, in 1984, killed about 8,000 people and brought that environmental issue to the attention of the world community. Subsequently, most multinational companies have established minimum standards for health, safety, and the environment that exceed the local requirements.

I believe that each of us should strive to develop our personal code of conduct based on what we identify as our ultimate standard of value. Moreover, our personal code should go well beyond just gratuities, bribes, and corruption. It should include important issues, such as the proper role of business and the proper role of government, as well as corporate and individual social responsibility; these are important ethical and moral issues.

My ultimate standard of value is my life on Earth lived at a high level of self-actualization (as opposed to basic biological subsistence). Based on that standard, my personal code of conduct provides a good level of comfort without contradictions. However, I accept that my code may not be “right” for you, and quite likely, your code will not be “right” for me. The debates about what should constitute the proper absolute moral code for all human beings will go on indefinitely because we do not all share the same cultural and ethical values, and many people are not yet ready to accept that their own life on Earth should be their ultimate moral standard of value.

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