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September/October 2003 - By Bruce Buchanan
Teaching Business Ethics: One School's Notes
Over the last several years, as corporate scandals have proliferated, there has been an increasing call on Op/Ed pages for MBA programs to include business ethics in their curriculum. The fact that some of the more egregious executive malefactors have MBAs from the nation’s top
universities has, no doubt, lent some urgency to this idea. And recently a number of prominent schools have announced, with some fanfare, the formation of business ethics courses and other similar initiatives. Still, within the academic and business community, doubts remain as to whether or not business ethics is a legitimate subject for MBA programs—something that can, in fact, be taught. And there is some concern that once the scandals blow over these initiatives themselves might silently
An ethics requirement
At NYU’s Stern School of Business, we have had an ethics requirement in the MBA curriculum for over thirty years. In the last decade all MBA students have had to take a specific required business ethics course, entitled "Professional Responsibility: Markets, Ethics, and Law." This course is a collaboration among a dozen or so professors at the school, most of whom have been on the project since 1993. And it has produced a custom
published textbook, which is now in its 10th annual edition. Each year, about 1,100 students take this required course in one of about 30 class sections. They receive grades in this course, and they can—in theory—fail it. The course is well received by the students and supported by the school administration, which is to say it seems to be working.
The purpose of this short note is to share some of what we as a faculty have learned putting this course together, in hopes that some of
these ideas and practices might be useful to other schools or to corporations. Though I am the course coordinator, I stress that the development and implementation of the course has been a team effort. The faculty team is listed in Appendix I.
Premise of the course
One of the arguments against teaching business ethics is that, by the time students get to business school, their values and ethics are already well formed through the influence of such institutions as family,
religion, culture, and social class.
This argument misses the point: Business ethics are not personal ethics; rather, business ethics are the ethics of a profession, performing a specific role for society. Persons in such roles are judged by how well they perform the associated professional duties, not by their personal values or proclivities. In this sense, the job of a business ethics course is not unlike that of a legal or medical ethics course: to teach professional responsibility
to the aspiring members of a profession.
Still, business professionals differ from doctors or lawyers in that they are usually not licensed by the state or members of a guild. Business is in this sense an "open" profession because people can practice it without obtaining specific degrees or passing tests, and (with some exceptions, like the securities industry) cannot be barred from practice, short of incarceration.
Thus the premise of our course is that MBA programs
turn out business professionals. And even if the profession of business is open in the sense just described, members of the business profession still have a responsibility to perform their role in society with care and integrity.
What is the professional role?
Two major ideas underlie the concept of professional responsibility in business. The first is:
Business professionals work to further the interests of shareholders in a context of fiduciary duty.
concept of the fiduciary is long established in law—an agent occupying a position of trust who acts on behalf of a principal, behaving as would a reasonably prudent person in the conduct of his own affairs. Senior corporate officers and directors are fiduciaries per se, and are held by the courts to this standard, but even employees within the ranks of the firm are controlled by the fiduciary imperatives of care, loyalty, and disclosure. Thus a large part of business ethics consists of
understanding the fiduciary duties of business professionals in the modern economy. A quick perusal of reported behaviors in the major scandals—business professionals booking expenses as assets to increase reported income, CEOs throwing lavish parties for their spouses using corporate funds, outside directors failing to question wildly nonstandard accounting procedures—shows that many of these were failures to perform fiduciary duties.
But from the standpoint of the business
profession, fiduciary trust is broader than its legal definition: whenever a business professional violates his or her relationship of trust to shareholders, whether or not a specific law is broken or a legal prosecution ensues, the profession of business is itself degraded, with deleterious effects to the firm and society.
Thus, one goal of a business ethics class is to help students to understand their fiduciary duty to shareholders in both its technically legal and the broadly
The second major idea that underlies the concept of professional responsibility in business is:
Business professionals are responsible for the firm’s behaviors to stakeholders.
The actions of the firm have consequences for many parties besides the shareholders. And sometimes these are negative. Unsafe products and misleading advertisements harm consumers; pollution and abrupt plant closings affect local communities; discrimination and unsafe labor practices
violate the rights of workers.
There are times when the interests—especially the short run interests—of shareholders are opposed to the interests, and sometimes the rights, of other stakeholders. In such situations, absent a binding law, the business professional must decide for the shareholder—and for society—what the actions of the firm will be. In publicly traded firms, ownership is usually so dispersed as to have no effective control of the firm’s day-to-day decisions, or even
major policies. So the professionals who run the firm necessarily act as the ‘ethical’ agents of the shareholder in conflicts with stakeholders.
If a firm is operating a plant in a country with very few labor or environmental laws, or no enforcement of the laws on its books, then it falls to the business professionals running the firm to decide how much shareholder money should be spent on, say, factory safety or effluent control.
Or if an investment bank in a frothy stock
market has the chance to earn extraordinary underwriting fees for shareholders by selling inappropriately risky IPOs to its retail investing clients, then the business professionals running the bank must decide if or when to pass on any doable deals.
Or if a multinational is operating in countries where women are exploited or discriminated against, the business professionals running the firm have to decide whether to insist upon equal treatment for its women workers or to pander to
host country norms.
In these cases, business professionals must decide the ethics of company behavior with respect to workers, clients, the environment, and society generally. And sometimes the ethical high road is not going to be the profit-maximizing decision for the shareholder. Yet many would argue that society expects business professionals to strike some ethical balance between shareholders and stakeholders. And of necessity they do.
Thus another goal of a business ethics
class is to help students see the sometimes necessary conflicts between the interests of shareholders and stakeholders. Sometimes these conflicts are resolved by controlling law; other times, especially in trans-national contexts, they are not. The role of the business professional is to ensure that the firm obeys laws when they exist and to somehow adjudicate these conflicts when there is no law to do so. This is not to say that a business ethics course will provide the answers to these
difficult conflicts—it won’t—but it will alert aspiring professionals to the nature of the role they are about to assume.
Importance of market imperfections and failure
All examples described in the preceding section involve market imperfections or—in extreme cases—market failures. That is, all involve some degree of (i) monopoly or monopsony power, (ii) information asymmetry between parties to a transaction, (iii) uncompensated external costs, or (iv) exploitation of a public
We have all been taught in our micro-economics courses that efficient markets—markets that "work"—do not have material imperfections or failures. But business ethics challenges, as cited above, frequently involve some form of market imperfection, either between agents and shareholders, or between the firm and its stakeholders. So it seems that business professionals would simply see to it that they operate in efficient, perfectly working markets. But this raises another
problem: micro-economics also tells us that efficient, working markets do not produce supernormal profits for any party. Rather all parties earn a rate of return commensurate with risk.
Now, business professionals are hired—and richly compensated—to produce supernormal profits. Normal market returns can be obtained purchasing shares in an index fund; there is no need for expensive CEOs if that is the goal. If we believe the tautology that markets work unless they fail, then we are left
with the idea that business professionals serving the interest of shareholders are trying to somehow induce market imperfections. And this is true. They might call it something more positive—like competitive advantage, or core competency, or niche play—but the tautological truth is that there are no supernormal profits in perfectly functioning markets.
It is then the job of the business professional, as fiduciary agent of the shareholders, to seek out and—if possible, create—market
imperfections (monopoly power, monopsony power, unchecked pollution, exploitation of a public good, exploitation of information asymmetries) that produce supernormal profits for the firm. I hasten to add that many market imperfections—like strong premium brands commanding high prices, local monopoly, and intellectual property—are perfectly legal and ethically honorable.
To a certain, degree market imperfections represent a kind of best practice: no executive tries to make the market
more efficient and less profitable. Still, the astute business professional realizes that extreme market imperfections, whether technically legal or not, tend to provoke socio-political responses, such as new laws (Foreign Corrupt Practices Act, Sarbanes-Oxley), regulation (SEC’s Fair Disclosure), institutions (Public Accounting Oversight Board), even prosecution (U.S. v Microsoft), most of which do not serve the shareholders.
Thus the business professional is a moral agent for the
shareholder, acting on his or her behalf, sometimes against the interests or rights of other stakeholders, but in such a way as to be ethically, politically, and legally defendable so as not to provoke an untoward societal response. As such, the business professional performs a balancing act, based on a broad understanding of markets, ethics, and law, and combined with deep institutional knowledge of his or her own company, its customers, and competitors. Our business ethics course attempts
to educate students to the nature of this professional challenge.
The concepts of business ethics are reasonably easy to set out, but bringing these ideas to the classroom requires an unusual type of professor. In part, this stems from the fact that business ethics is inherently interdisciplinary. The analysis of a given case is likely to draw ideas from marketing, management, finance, and accounting, as well as political science, philosophy, and law, rounded out with
principles of experienced judgment and common sense. Moreover, problems and cases in business ethics are rarely amenable to closed form, algorithmic solution. That’s why some issues are debated for decades without resolution.
Business school professors, by and large, are trained in one of the disciplines of business (finance, marketing, accounting, operations management, etc.), not all of them. And because they tend to teach the discipline in which they are trained, they are usually
the "authority" in the room when they teach. But no business school professor is an authority in all the disciplines likely to arise in a complex business ethics case. So the professor must be willing to act more as a facilitator and less as a lecturer, must be willing to admit that he or she is not the "authority" in all aspects of the case, and—especially when the students themselves are executives—must be able to draw on student experience and judgment and bring out the
wisdom that is in the room. Moreover, the professor must be intellectually honest enough to leave some cases unresolved.
Just to consider a very brief scenario: is it appropriate for a firm to pollute more in a developing country if it: (i) is not breaking any enforced law, (ii) maximizes shareholder returns, (iii) brings manufacturing costs in line with competitors who are doing the same, (iv) arguably fosters economic development? Students will want to know the "answer" to
such a case, and professors who are used to being authorities in the classroom will feel they have to supply one. But in fact such cases tend not to have answers at all—they produce conflict.
Very few secular business schools in the so-called top tier hire entry-level professors as business ethicists, and almost none have full-fledged departments of business ethics or grant doctorates in it. Business ethics as a discipline is not a career path for the aspiring business school academic.
In most cases, the business professor who wants to research and teach business ethics must get a Ph.D. in one of the conventional disciplines (finance, management, etc.) then establish his or her research reputation—and get promoted, and tenured—within it. All of this helps to explain the difficulty that some schools experience in attempting to establish and maintain programs in business ethics. There is no organized supply side in the market for business ethics professors.
with all these ideas, we at Stern have found that the professors who do well in our business ethics course tend to be those who display some combination of the following:
• Solid intellectual capabilities and demonstrated excellence within their home discipline.
• Broad intellectual interests outside their home discipline.
• Experience in business and management, either as an employee or as a longstanding consultant.
• An appreciation for the political, social, and legal context of business.
• A comfort level with ambiguous situations and incomplete solutions.
• A willingness to play a "non-authoritative" role in the classroom.
Usually, our professors are well established (almost always full professors or tenure track) and most have had some significant business experience outside academia. Some very effective professors are adjuncts who come in to teach our courses while
maintaining a full-time professional life, bringing their experience and judgment with them, and some of these are attorneys who have deep experience in corporate settings.
Because the course is so interdisciplinary, we have found that regular meetings of the teaching faculty are very helpful. These give each faculty member the opportunity to discuss cases and issues with colleagues, and allow each to contribute his or her own expertise to the preparation of
the case for class discussion. In this way, the collective experience and judgment of the whole teaching group is brought to bear on each case. Also, we sometimes invite guests who have a special expertise to share with the rest of the faculty. We have also found, over the years, that these meetings help to foster a sense of collegiality among the teaching faculty, who are otherwise scattered among the departments of the school.
Ethics has a long history as a field of
enquiry, with many different theories that have been expounded and debated in great detail. Due to constraints on time and interest, we have found that the application of ethics to business works better when we stick to basic ideas and principles. Much of our course uses a case-based approach. That is, students are confronted with a business situation that, due to market imperfections, raises ethical issues. Students begin by discussing the case and possible solutions; they also explore the
inter-relationships between market imperfections and ethics of outcomes. If the case is well constructed, the class will divide on the best course of action. The instructor tries to bring in ideas from the field of ethics to put some structure on the discussion and to help students more rigorously define and defend their positions. Students are encouraged to do the same. The instructor’s role is not to take sides but to help students to see the ethical principles that underlie their positions.
We have found that cases are more effective when there is not a "correct" answer, so that the final solution is a matter of judgment, and when the instructor does not "solve" the case in any way, and a number of viable solutions are left at the end. Frequently, with such cases, no clear consensus emerges from the class discussion. This can be frustrating. But what students learn is that different people with different experiences and perspectives will make
different decisions in a given situation and hold to their views firmly or even vehemently. Students also begin to understand the ethical principles behind specific positions, and how different ethical principles or frameworks lead to different decisions.
To very briefly consider the ethical fault lines in the course, the "efficient working market," or Adam Smith’s "invisible hand" is—in theory—supposed to lead to a utilitarian solution: the efficient allocation of
resources and hence the greatest good for the greatest number. But even a perfectly working market can conflict with other ethical and political principles. For example, an efficient market presumes a condition of "perfect information," but perfect information is inconsistent with the principle of privacy. In a full information economy, marketers could inspect your disk drives to learn your preferences and aspirations, prospective employers could review your complete health records
to see if you will be too costly to their medical plan, and competitors could hack your system to learn your marketing strategy. The fact that such practices are debatable and in some cases illegal indicates that a "utilitarian market solution" sometimes is at odds with other societal principles.
And when there are market imperfections, then the strength of the utilitarian market solution is itself questionable, and other ethical principles, such as standards of truth, human
rights, and professional duty come into play.
Getting students to prepare for class and to take these cases seriously can be a challenge, and the Stern faculty generally agree that two aspects of the course are very important to its function: (i) it is absolutely required of all MBA graduates, and (ii) students receive a letter grade. The net effect is that most students put a reasonable effort into the course. Also, the fact that the Stern faculty have voted to make this a required
course signals its seriousness to the students, who respond accordingly. Students are graded on their class preparation and participation, and that they also submit several short papers as well as a longer term paper for the course.
Organization of topics
Finally, here are a few words about the specific topics that we cover in our required MBA course. The topics from the 2003-04 edition of our custom published textbook is shown in Appendix II.
The first part of the
book, and the course, is designed to make clear the inter-relationships between markets and ethics. Namely, that a well-working market tends towards a utilitarian outcome (which in itself can raise ethical concerns) and that an imperfect market tends to be inefficient on utilitarian grounds as well as ethically suspect in other ways.
The second section of the book and course are focused on the idea of agency and fiduciary duty to shareholders, and specifically addresses truth and
disclosure, side deals, loyalty/whistleblowing, and trade secrets.
The third section of the book moves the focus to the corporations and their governance, with explicit reference to directors’ duties, shareholder issues, insider trading, and control by law via the federal Sentencing Guidelines for Organizations.
Finally, we broaden the focus out to corporations and society, and consider social responsibility, moral standards across borders, and issues of human rights such as
non-discrimination, safety, and privacy.
In the end, the course is about building awareness, and a certain sensitivity, to the complexities and nuances of the role of a business professional. We fully recognize that a once-a-week, one-semester course cannot possibly provide a complete education in this very challenging area. But we believe that it at least introduces the students to the importance of the subject, and provides a rigorous, principled foundation upon which the student can
continue to learn. o
Bruce Buchanan is the C. W. Nichols Professor of Business Ethics, and Professor of Marketing, at New York University’s Stern School of Business.
Reprinted from the September/October 2003 issue of ethikos.
© 2004 Ethikos, Inc. All rights reserved.
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