economics | The Business Ethics Blog

Russian Business Ethics

Posted February 24, 2011
Filed under: accountability, corporations, economics, ethics, international, transparency, trust |

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We can learn a lot about the fundamental nature of business ethics by looking at its operation in various countries at different levels of economic development and with very different histories. Former members of the USSR are a good place to start. Russia, for example, was once at the heart of the Soviet empire, yet today — 20 years after the fall of that empire — Russia continues to struggle. The country’s per capita GDP is middling (i.e., about 1/3 of American GDP), and the economy has been growing steadily for years, but it’s far from free of problems. Law and order (including the functioning of its basic democratic institutions) continues to be a challenge there. Note also that Russia fares very badly on Transparency International’s Corruption Index.

So what about the role of business ethics in civilizing (and hopefully growing) the Russian economy?

See this story by Khristina Narizhnaya, for the Moscow Times: Business Ethics Get Codified

Business ethics are improving in Russia, on paper at least.

More local companies are emulating Western standards and adopting ethics codes to help them operate in a corrupt environment and create the appearance of trustworthiness.

Such codes regulate everything a company’s employees do, from how they dress to how they act in case a bribe is offered….

In the last three years, state companies, including Sberbank and Rosneft, have established codes for their workers as part of President Dmitry Medvedev’s initiative to increase transparency. Gazprom has begun putting together its ethics guidelines, which could take more than a year to deploy. Private companies have followed suit….

The entire piece is interesting and well worth reading, but I think couple of issues in particular are worth thinking about. First, what is the point of all this explicit attention to ethics? Interestingly, at least some Russian business people seem to be aware that ethics is a fundamental building block for real success in business:

“It is good for the image — and clients, investors and partners respond with trust,” said Econika chief executive Andrei Iliopulo.

(The reference to “image” is a distraction, there. Iliopulo’s main point is about trust.)

Others see ethics as an absolute necessity on a macro scale, for the Russian economy as a whole:

Some experts see the ethics code trend as an example of transforming the economic model from wild capitalism to socially responsible business.

“Business feels this need and tries to fulfill it,” said Alexander Sergeyev, a professor at the School of Higher Economics. “It might seem strange, but people like to live by the rules….”

And then there’s the question of scope, and focus. What are the key issues to focus on? As the story notes, ethics codes can cover everything from conflict of interest to social responsibility:

[British-Russian conglomerate] TNK-BP’s code outlines a set of principles covering ethical conduct, employee behavior, external relationships, health, safety, security and environmental performance, control and finance.

That’s quite a range of issues. And when thinking about a country still struggling to “find its feet” in terms of business ethics, we might well want to ask about priority-setting. So, question for discussion: of the various issues mentioned above, which one should Russian businesses be focusing on? I’m not suggesting single-mindedness. But for the good of the Russian population as a whole, which business ethics issues is likely to be the most important?

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(For more on the importance of business ethics for economic development, see Nobel Prize-winning economist Amartya Sen’s “Does Business Ethics Make Economic Sense?”)

Four Myths About Business Ethics

Posted December 6, 2010
Filed under: decision-making, definitions, economics, ethics, government |

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Here are four important myths about business ethics. There are surely many myths about business ethics, but these 4 in particular cause trouble, and pose significant challenges for anyone trying to have a productive discussion about right and wrong in the world of business.

Myth #1. “Business ethics” is an oxymoron.
The idea that “business ethics” is somehow a contradiction in terms is based on a serious misunderstanding of what ethics is and what the world of commerce is like. Indeed, it’s much closer to the truth to say that the term “business ethics” expresses a redundancy, since commerce is quite literally impossible without ethics. Every single commercial transaction requires some level of trust, and without a shared commitment to some level ethical behaviour, you simply do not get trust. Indeed, economists are more than ready to point out the huge range of ethical norms that underpin the modern economy and make it run more efficiently.

Myth #2. Ethics is just a matter of opinion.
Again, false. While ethics does of course have something to do with having an opinion, it’s also about having opinions that you can defend to other people. While there certainly are a few really tough moral questions about which we might agree to disagree, we should also recognize that on many ethical issues there are better and worse answers. Poor answers to ethical dilemmas are typically rooted in factual mistakes and logical inconsistencies. We shouldn’t settle for those. We should talk them through. (And, as a I blogged recently, having an opinion doesn’t come to much if you can’t sell that opinion to others.)

Myth #3. There’s no such thing as “business ethics,” because ethics should be the same everywhere.
There are two main reasons why ethics, while essential to business, isn’t just exactly the same in business as it is in other domains of life.

First, business poses special challenges. The enormous productive capacity of corporations and other large organizations also brings the potential to do substantial harm, both to the lives of stakeholders and to the natural environment. So we face questions in the world of commerce that we just don’t face in other parts of our lives. Second, the special social role of business implies a tailor-made set of ethical principles. One of the defining characteristics of business is that it is competitive: companies are naturally driven to do better than others in their field. This kind of behaviour is socially beneficial — consumers benefit when companies compete vigorously to produce a better product, at a better price, than the other guy. In practice, we can really look at business ethics as having two importantly different components. One component consists of the rules needed to civilize a tough, competitive game. This part of business ethics essentially has to do with the norms-and-principles that ought to govern business’s behaviour with regard to outsiders. The other component of business ethics is about the ethical rules that ought to be embodied in relationships within the organization. Here, we do value cooperative behaviour; so managers work hard to shape corporate culture to enable employees to trust each other and to work together toward shared goals. Business is morally complex that way.

Myth #4. Business ethics is just a matter of laws and regulation.
This is not just false, but dangerous. The tendency to confuse ethics and law is tempting, especially in an age in which the business section of the newspaper increasingly refers to “ethics laws” and “ethics regulations.” But we shouldn’t be misled by that short-hand way of speaking. If you think about it for just a minute or two, there are in fact lots of ways in which law and ethics come apart. There are plenty of things that are legal but unethical; and there are also behaviours that are illegal, but arguably ethically OK. The short explanation for the fact that law & ethics don’t overlap perfectly is this: laws are made & enforced by government. But governments can’t be everywhere, and if they could, we wouldn’t want them to be!

These surely aren’t all the myths there are about business ethics. But these strike me as four that are particularly common, particularly troublesome, and particularly clearly wrong.

Ethics and Economics (And Coffee Too)

Posted October 18, 2010
Filed under: complexity, economics, pricing, wages |

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A bit of economics can go a long ways in helping understand a range of issues in business ethics. I’m not an economist myself, but I’ve read a fair bit of economics here & there. And I want to read more. In order to arrive at sound ethical conclusions, you need more than just ethical beliefs: you need some understanding of how the world works. For many issues in business ethics, economics provides relevant facts.

For example, consider ethical issues related to price. Prices are clearly important to all of us: the price of a thing tells us how much we would have to pay to get it. But economists recognize that prices play two other very important social roles, roles that are important to the way the economy as a whole operates.

First, a price conveys information. When something is expensive, that tends to convey the fact that it is scarce — scarce enough that buyers are willing to pay a lot for it, and are perhaps even competing with each other and hence bidding up the price. Likewise, when something is cheap, that generally conveys the fact that it is plentiful. (Note that scarcity can be either natural, a straightforward matter of the amount of a thing in existence, or artificial, as when some person or company gains monopoly control over the supply of a thing.)

Second, a price provides motivation. People are generally (though unevenly) motivated by money, and by money-making and money-saving opportunities. (If you really don’t care about money, you should send me all of yours. Thanks.) Among those who want to buy a good, high prices tend to lower demand, and low prices tend to increase it. Price also affects suppliers. The fact that the price for a given good or service is high is going to tend to motivate people to want to get into that line of business. A low price is going to tend to deter people from making that their line of work.

Now, how does that understanding of the social role of prices affect a real-life issue in business ethics? Here’s a simple example of the social function of prices at work, and why economics matters for ethics. It’s an example I learned from the book, The Undercover Economist, written by economist Tim Harford.

Consider coffee. Coffee is a hugely important commodity — second only to oil on the world market. Most people know they now have the option of buying ‘fair trade’ coffee, the aim of which is to make sure that the people who grow coffee get a fair deal for what they produce. (October is “Fair Trade Month,” by the way.)

Hartord’s argument is this. Coffee farmers are poor, and will generally remain poor, because the thing they produce isn’t scarce. Coffee is relatively easy to grow, and can be grown in relatively many (hot) places. Buying fair trade coffee (at a premium price) means paying coffee farmers more. Now, recall what I said above about the role of prices in motivating people. Paying more for coffee is likely to draw more growers into the business. And drawing more growers into the business will increase the supply of coffee. And if you increase the supply of coffee, you inevitably depress its market price — and along with it the wages of those who labour on coffee plantations. So it’s hard to make coffee growers alone better off, until workers in other industries (like the garment industry) are well-enough off that they can’t be attracted into the coffee industry by (for example) fair-trade-driven higher wages. According to Harford (p. 229):

High coffee prices will always collapse, until workers in sweatshops become well-paid blue collar workers in skilled manufacturing jobs, who don’t find the idea of being even a prosperous coffee farmer attractive.

That makes it awfully hard, if not impossible, to boost net wages in the coffee industry, in the long run. Now, that by itself is nothing like a conclusive argument against fair trade coffee. But a sound understanding of the economic role of prices does give reason to pause before we accept the notion that we can make people better off simply by voluntarily paying more for a non-scarce commodity. (I’ve blogged before about other problems with the fair trade notion. See: What’s so Fair About Fairtrade?)

As I noted above, I’m not an economist — so if someone reading this can help by correcting anything I’ve written here, or add any further detail, I’d be grateful.

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Here are a few books about economics that I recommend (not all equally good, and I recommend them for different reasons). All of them are aimed at non-economists, and 2 of the 4 are even written by non-economists.