The curious case of business ethics

By Jim Lemoine, Assistant Professor of Organization and Human Resources

This rumor had reached my team, so I was swamped with questions about whether their jobs were safe. I promised to get to the bottom of it at an upcoming managerial retreat.

As the meeting progressed, the CEO and his team talked vaguely about a promising future without providing specifics on the fate of our people. At the end of the day, I finally had a chance to ask what the plan was for the assistant managers. The reply was simple and positive: “Please let your assistant managers know they’ve got a future with this company, so we hope they’ll continue their work.”

“Great,” I said. “They’ll be relieved to hear their jobs are safe.”

The executive quickly laughed and replied: “Oh, their jobs aren’t safe. We’re laying them off in three months. But we don’t want to lose their productivity in the meantime.”

I didn’t last long at the company after that, but was surprised by how many people did. Several of them debated me over whether this course of action was ethical. I thought lying to our people was unethical, but my colleagues insisted it was more complicated than that. They argued that the best thing for the company and its (remaining) employees would be to get as much as possible out of those assistant managers in the time they had left—in other words, the good of the many over the good of the few. Though it would hurt the people being laid off, it would benefit the majority of employees and, ultimately, the people the business was formed to benefit: its owners and stockholders.

What are business ethics?

This dilemma suggests a key question for leaders: What are business ethics? Most people answer, “Doing what is right,” but that fails to tell us exactly what is right—and what is wrong. Martin Shkreli, CEO of Turing Pharmaceuticals, called himself “altruistic” for hiking the price of a lifesaving drug by more than 5,000% to raise capital to increase research, development and dividends. In a less extreme case, Apple marks up iPhones by about 300%, aggressively markets them to the poor, generates exorbitant profits and keeps billions of dollars overseas to avoid U.S. taxation. Opinion is widespread against Turing, but Apple has many defenders who say its management is simply doing what’s best for the company (and their happy stockholders).

Two views on business leadership and ethics have emerged over the past few decades: The first is a stockholder-centric view conceived by economist Milton Friedman. He claimed the most ethical thing for a business leader to do is focus on profits alone, to the exclusion of all other stakeholders. Friedman argued that even donations to charity and other corporate social responsibility initiatives are unethical, as they amount to “stealing” resources that rightfully belong to company stockholders. He suggested that if stockholders wish to donate their profits themselves, that is their right, but management has no mandate to give away their money.

The stakeholder approach, on the other hand, argues that customers, employees and communities are not only valuable stakeholders in and of themselves, but are also the best route through which to grow stockholder value. This approach is exemplified by a concept called servant leadership, in which leaders see themselves as servants of these stakeholders, working through them to grow their organization by listening, partnering and developing. Detractors claim that serving stakeholders and working to help employees (rather than coercing or simply ordering them) wastes vital resources and inefficiently pursues profit. However, servant leadership theory instead proposes that organizational success and service to stakeholders form a mutually reinforcing spiral: Serving stakeholders contributes to firm growth, and more successful organizations can better serve stakeholders.

Quantitative researchers have attempted to resolve this conflict, and their results may surprise you. They consistently find that CEOs who broadly prioritize stakeholders in addition to profits tend to have more profitable companies than CEOs who prioritize profits alone. Teams led by servant leaders outperform other teams in such areas as motivation, engagement and commitment. And my own research has uncovered evidence that servant leadership creates a trickle-down effect, such that managers and employees led by servant leaders become servant leaders themselves.

We may never completely agree on what is or isn’t ethical in business or in life more generally. But what shouldn’t be so subjective is what approach to ethics is in the best interest of an organization. Here, the answer for leaders is clear: By prioritizing employees, customers and communities, leaders build stronger teams and organizations—and stronger societies. That’s the promise of servant leadership.