Last week, the U.S. Attorney's Office in Chicago indicted Lord Conrad Black with eight counts of mail and wire fraud. U.S. prosecutors claim that he and three other executives diverted nearly $84 million from his media empire, Hollinger International.
Black and others are accused of abusing corporate perks, diverting millions of dollars through unauthorized transactions, and lying to shareholders. If guilty, Black could face up to 40 years in jail and $2 million in fines. Last Monday, Hollinger announced that six of its directors were stepping down from the board. This is worrying since Black has often said that many of his actions as chief executive of Hollinger were approved by the company's board of directors.
It seems that every year yet another high profile chief executive is charged with fraud. What has happened to good business ethics? It is usually thought that ethical practices, while costly in the short-run, are good for business since they generate positive long-term externalities.
Good ethical practices are a perquisite for building trust with potential partners, and this trust is necessary to foster loyal and innovative long-term cooperation. If business ethics is reduced to a cost benefit analysis, then it is synonymous with enlightened self-interest that always pays in the long-run.
There is a lot of truth to that assertion. Nobody will deny that treating employees, customers and business partners is good business practice. It entails short-term costs but it is an investment in future loyalty which usually pays off. This idea is at the root of American business practices. Isn't the customer always right? The real question, however, is not whether ethical behavior may be good for business - we know that it is - but whether long-term self-interest always leads to ethical behavior and vice versa. I will agree in accordance with Bernhard Schwab that this is not always the case.
The indictment of Black is another example that questionable business practices do exist. Most corporations abide by high standards of ethical conduct. But the routine indictments of chief executives as well as wide-spread corruption in many parts of the world leads one to conclude that good business and good ethics are not always synonymous. In addition, if good ethics always led to good business, many of the laws and regulations in place today, like the Security and Exchange Commission, would be unnecessary.
The lack of an established code of ethics for business practices can be viewed as giving decision makers - CEOs, boards of directors, small business owners - an option. She or he may break ethical rules if the benefits of doing so outweigh the costs, but can choose not to do so if the costs are too high. One can choose to bribe government officials to exploit a coveted natural resource, though the disclosure of a bribe may negatively affect public relations to such an extent that the benefits of the bribe are outweighed by the loss in public image. There is thus a cost to abiding by strict ethical norms. It reduces decision makers' choices.
In addition, the main benefit of pursuing good ethical practices is that it is a signal to others that we are trustworthy and thus good business partners. This means that ethical behavior is valued for the public relations benefits it generates. Thus, there is an incentive for firms to exploit any good ethical practice it implements in order to maximize its public goodwill. Business ethics thus becomes an exercise in image. If one could be sure that he or she would never get caught for bribing an official and thus greatly increase a company's shareholder value by gaining access to rare raw materials, what would be the incentive to abide by high ethical standards?
What does this mean? It means that while good ethical behavior is good for business, it does not have to be. Without an established and institutionalized code of conduct, decision makers have the option to be ethical but do not always have to be. Chief executives are often under a lot of pressure to maximize shareholder value in the short run. That is how they are compensated and how they are judged. This provides the kind of incentive that I think leads decision makers to make ethically questionable choices.
Does that excuse their behavior? Not at all. It just means that we as a society should work together to create incentives that encourage and reward ethical behavior. Regulations should be tightened, enforcement stricter, and contracts between boards of directors and chief executives should include ethical clauses. I hope that the indictment of Black will motivate Congress not to create new laws but to increase the funds available to monitor and pursue delinquent chief executives.
