The Wall Street Journal published this article by David Vogel, the George Quist Professor of Business Ethics, on August 20, 2002. Vogel is the editor of the California Management Review and hosts the Haas School’s annual Rudolph Peterson Lecture in Business Ethics.
In recent years, business ethics has become a central part of many corporate strategies. Ben & Jerry’s made its name focusing on environmental responsibility; Nike learned the hard way the price of perceived injustices at overseas factories. And Shell Oil faced a public-relations nightmare a few years back when Greenpeace activists launched a high-profile protest against oil dumping in the North Sea.
Corporate responsibility, which has been gaining ground since the 1970s, has gone global. More than 300 firms world-wide have signed onto the United Nations Global Compact, pledging good global citizenship in the areas of human rights, labor standards, and environmental protection.
Addressing social concerns, then, has become part of many business plans. Fifty-four socially responsible mutual funds have been created in the US and scores more in Canada, Europe, and Japan. Based on the premise that companies that “do good” will “do well,” approximately $1.5 trillion dollars world-wide is now invested according to social or ethical criteria.
So how does all this corporate responsibility relate to the parade of abuses, creative accounting, and outright fraud we’ve seen of late? While they’ve been saving the earth, many managers have been systematically abusing the trust of their shareholders, and in some cases their employees as well. Portraits of enlightened managers have given way to depictions of managerial greed.
Companies like Alcoa, 3M, Dupont, and Dow Chemical have substantially lowered their production costs by reducing their emissions and solid wastes. But those who claimed that corporations were at last becoming socially responsible mistakenly assumed that managers were only under pressure to behave better. Equally significant changes in the business environment have encouraged many firms to behave worse.
As executive speeches and academic writings on business ethics never tire of repeating, there is evidence that corporate responsibility “pays.” But managing earnings also “pays.” It can lower the cost of capital, facilitate acquisitions, and increase executive compensation. In short, like corporate responsibility, corporate irresponsibility has paid, especially for certain executives.
Over the last decade, many managers have discovered the financial rewards of maintaining good relations with both environmental groups and Wall Street analysts. Consider, for example, three of the firms whose accounting practices have come under public scrutiny.
Enron was long regarded as an exemplary corporate citizen. The firm and its senior executives were generous supporters of community institutions in Houston, and it captured international attention by building a power plant in India without resorting to bribing government officials. Enron also lobbied the Bush administration in favor of an international agreement to address global warming – in the expectation that it would then be able to create a market for carbon trading – and the company pleased many environmentalists with its investments in alternative energy.
Merck, the drug company recently criticized for misreporting some revenues, received a prestigious award in 1991 from the Business Enterprise Trust, for its decision to develop and distribute Mectizan, a drug effective against river blindness which threatens 85 million of the world’s poorest people. Since 1987, Merck has been producing and distributing this drug free to all international aid programs at an annual cost of more than $100 million. In Fortune’s annual survey of corporate reputations, Merck has consistently received high marks for “corporate responsibility.”
Xerox recently paid a $10 million fine to settle a civil suit filed by the Securities and Exchange Commission accusing it of misstating profits by nearly $3 billion over four years. Yet Xerox has also been a recognized international leader in enviro-management, pioneering a program that recycled its copy cartridges as well as the copier itself.
And of course, in the 80s, Arthur Andersen provided substantial funds to promote the teaching of ethics in business schools throughout the US.
Firms are rarely as virtuous or corrupt as the media portrays them. Our challenge is to restructure incentives to make it in the self-interest of more firms to behave more responsibly more of the time. “Doing well by doing good” should apply to earnings reports too. But while we continue our efforts to discourage and penalize “infectious greed” we now have a different perspective on the meaning of corporate responsibility.
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