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Why is it hard to be ethical in business?

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By Antonio Argandoña

No one ever said leading was easy, much less leading with ethics. But the latter is very important. It is the difference between a good executive, in the full sense of the expression, and one who only knows how to achieve technical perfection, and how to do things right, but does not know how to do what needs to be done in each case, with long-term vision and a sense of responsibility.

Being ethical in business is difficult, given the nature of the tasks involved with leading an organization:

  1. The decisions are complex; there is no time for reflection, vital information is missing, etc.
  2. The competition is intense, sometimes brutal.
  3. We are enslaved by results: You are what you achieve, and there are perverse incentives, which lead people to do things that should not be done because people get paid to do things they should not be doing.
  4. There is an abundance of inertia, i.e., “that’s how it’s always been done.” It is the success trap.
  5. There are mistakes, inevitably, and the human tendency to deny them or cover them up, which makes change very difficult.
  6. Moral sensitivity is reduced. Ethical problems are not apparent, as they are often masked under technical considerations, which are the dominant force.
  7. There is a lot of cognitive dissonance: resistance to accepting evidence contrary to what we think.
  8. There is the tendency to rationalize the behavior: What is immoral is presented as something acceptable, as a normal practice, “everyone does it”…
  9. There is also a prevalence of bureaucratic culture: “This is how things are done here,” “Follow our lead or you’re out of here,” etc.
  10. Ethics is not considered a part of the company’s decision making. Decisions are made by experts, who only consider their limited field, and overlook the implications of their decisions on others: a salesperson decides what needs to be done to make sales, regardless of whether this affects manufacturing, harms the environment or creates comparative injustices for other departments. In other words, a partial, limited approach is an invitation to not act ethically.
  11. Individualism predominates in business as well: everyone has their own agenda, especially at the executive level. Values are a private matter. The idea of what is ethical bothers me, because it doesn’t allow me to do things my way. The company ends up being an amoral subject: ethics should not come into play here; at most, as an adornment, but that’s it.

The way ethics manifests itself in the company doesn’t make it easy to do the right thing either. We demand that ethics be profitable… because if not, the governing body would not accept it. We reduce ethics to a set of external constraints that are imposed by society or the media. This reduces ethics to a code of conduct, which must be met even if it is not profitable—so we might as well not pay much attention to it.

Or ethics could mean doing something extra: a spa for employees, inviting them to volunteer on weekends, or doing philanthropic work with the profits.

Yes, it is hard to be ethical in business. But it is necessary . Being familiar with the road we must travel on will help us avoid the potholes and roadblocks, and allow us to move forward successfully while being truly good executives. Believe me: it is worthwhile.

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How much does it cost to be ethical? What is the cost of corruption?

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The opposite day, my 10 year-old son requested me how a lot it prices to be moral.  Not likely a shocking query for the son of an ethics professor, however one which has no straightforward reply. So, how can we measure the impression of doing the correct factor?

Contributing to the welfare of others and your individual is frankly, a priori, a broad query.  If I had been to reply my son’s query in a easy manner, I’d attempt to flip the query round and as a substitute ask, what occurs if I don’t do the correct factor? What’s the price of corruption?

Stop Corruption, by kmillard92.
Cease Corruption, by kmillard92.

On the one hand, anybody can communicate freely about variations in notion, and there are research in regards to the notion of corruption.  But once we attempt to apply statistics and actual numbers to this phenomenon, its very nature impedes us from accessing these numerical values; its obscurity and lack of transparency leaves no path to comply with, typically because of the varied and inventive means corruption has of additional selling different corrupt practices past the financial (presents, journeys, particular favors, and many others.).

So what prices does corruption incur?  The price of corruption is far more than monetary; it’s also social, political, environmental and human:

  • Monetary: Corruption has a direct impression on the wealth of countries, diverting funds to “non-public” functions, as a substitute of to the frequent good.  It additionally generates an underground economic system, dissuading overseas funding (in accordance with Transparency Worldwide, dropping one index level results in dropping the equal of 0.5% of GDP in overseas funding) and inspiring capital flight.
  • Social: It additionally corrodes belief, not solely in establishments, but additionally in individuals.  It generates frustration, apathy, discourages the entrepreneurial spirit, accentuates social inequities and promotes organized crime.
  • Political: Corruption is likely one of the biggest obstacles to democracy and the rule of legislation.
  • Environmental:  Unacceptable practices in developed international locations are additionally carried out in creating international locations, along with the overall pillaging of pure sources.
  • Human: It damages human nature and creates a rift between human beings and their final objective.

If we focus simply on the monetary value, within the Nineties Enterprise Week printed the outcomes of a College of California examine that exposed the precise value of corruption.  For instance, accepting a bribe or giving in to extortion to hurry up licensing procedures or to acquire a public contract led to a 3 to 10 % improve in charges.  In the long run, the products and companies topic to corruption had been 20 -100% dearer.

In 2003, the U.N. signed the primary worldwide anti-corruption treaty.  At the moment the Related Press gathered quotes that illustrated the extent and gravity of corruption in lots of international locations:

Corruption … has ruined our colleges and hospitals [..] It has destroyed our agriculture and industries. It has ‘eaten up’ our roads and jobs. … It has destroyed our society.”  Justice Minister, Kenya.

Anthony Value, The U.N.’s prime anti-crime official, made the next observations:

“Zaire and Nigeria, two of Africa’s hardest-hit states, have misplaced some $5 billion every in the previous couple of years to graft, most of it spirited out of these international locations.”

“In Pakistan, an estimated 30 % of the value of all public works initiatives goes to kickbacks and bribes.”

“In Bangladesh, corruption eats up a whopping 50 % of overseas funding.”

In 2004, Daniel Kaufmann, the World Financial institution Institute International Governance Director, revealed that all through the world multiple trillion U.S. {dollars} ($1,000,000,000,000) had been paid yearly in bribes, not together with misappropriation of public funds or embezzlement.  This determine estimates bribes paid each in wealthy international locations and creating international locations.

Did You Say "Bribe"?, by Chris Potter (StockMonkeys.com)
Did You Say “Bribe”?, by Chris Potter (StockMonkeys.com)

Kaufmann noticed that the whole financial sum of corrupt transactions was only one a part of the whole value of corruption, which in and of itself is a serious obstacle to the discount of poverty, inequality and toddler mortality in rising economies.  Different insights that got here out of this examine included how in the long term the nationwide incomes of nations that battle corruption and enhance the rule of legislation can improve as much as 4 occasions. On the identical time, the examine discovered that such efforts would result in a 75% lower in toddler mortality.

In 2009, Transparency Worldwide printed a report that discovered that corruption in Eire value the state three billion kilos.  In the meantime, in Italy the Court docket of Auditors confirmed that authorities corruption value 60 million euros per 12 months.  Within the U.Okay., the Nationwide Fraud Authority quantified fraud at 73 billion GBP in 2012.  On the European degree, in 2013 the E.U. estimates that corruption all through the 27 member states prices 120 billion euros per 12 months. In Spain, a current examine positioned the social value of corruption at 40 billion euros.

Whereas it’s troublesome to understand corruption’s monetary impression, these numbers do assist to make clear the gravity of the phenomenon.  Fascinated about the price of corruption in relative phrases can also be enlightening.  For instance, if we refer again to the determine cited by Kaufmann – $ 1 trillion USD – and we evaluate it with the $150 million USD in worldwide assist provided for catastrophe aid following the current storm within the Philippines, the pressing have to fight corruption is kind of evident.

Going again to my son’s query, and with out dropping sight of the bigger and better motives past the financial that justify working in direction of good, the figures cited earlier do certainly assist me to reply his query: Many good issues rely on our doing good.  By making brave and trustworthy selections, we are able to rework actuality and create not only a extra simply world, but additionally a happier one.

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General Management Standing its Ground

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IESE Business SchoolOne of the most valuable legacies that the founders of IESE created is the institution’s general management focus, both for teaching and other business activities.  Long before, Chester Barnard, a prominent pioneer in the field of management who brought together executive experience and humanistic training, alluded to a similar focus, emphasizing that in the management process “the sensing of the organization as a whole and the total situation relevant to it,” is indispensable.

The general management perspective views an organization as a whole, integrating strategy , finance, operations, and marketing in addition to all the other functions of a company.  This approach requires stepping away from narrow perspectives centered solely upon one area – whether strategy, finance or marketing – and the factors characteristic to each.  The result is running the risk of overlooking the company as a whole.

Within this perspective, business ethics, as I discussed in Business Ethics in Action, views the general manager’s role as that of someone managing a community of people who provide products, create wealth and serve society, doing so fairly and justly.  Promoting human excellence and efficiency as an approach to organize, act and interact with others, business ethics, above all, guides senior management, encouraging it to always seek the common good in business and society through all of its actions.

This general management and business ethics perspective is not unique to IESE.  However, opposing tendencies have been prevalent in the international realm for some time, especially in business schools, particularly “Strategic Management courses displacing “General Management” courses.

748px-Eisenhower_d-day
General Dwight D. Eisenhower addresses American paratroopers prior to D-Day.

Inspired by military lingo, the notion of “strategy” was introduced into business schools more than 50 years ago.  Later it gelled into courses on “Strategic Management” and in the creation of the corresponding academic departments.  The argument that justified the resulting exclusion of “General Management” courses and departments (which had formerly incorporated strategy) was that strategic management was at the core of general management, or at least it was its main function.  In some business schools the process took place merely to mirror what some prestigious U.S. institutions had done.

Although there are diverse emphases and definitions, generally, strategic management refers to all of the aspects that affect the company, taking the competitive context in which the organization exists into consideration.  The approach attempts to adapt the business organization to its surroundings, seeking opportunities and confronting competitors and possible competitive threats.  Strategic management, then, tends to be the compass for all of senior management’s and the entire organization’s activityThis tendency places businesses at risk of reducing general management to one of its components, and in this way, substituting the whole with one of its parts.

The problem is that strategy is always a means; it is a strategy “to achieve” an ends, generally financial.  What is important is to be successful in attaining the particular objective that the strategy is targeting.  Often there is a tendency to step back from other business elements.  For example, there are strategy books that examine the strategy Madonna implemented to achieve success or how companies like Wal-Mart have succeeded.  For some strategic management professors, Sun Tzu’s The Art of War makes the top of the reading list, characterizing competitors as the enemies to defeat.  Others may not go to this extreme, yet they do see strategy as the essence to achieve financial gain wherever it may be.  Fortunately, there are still plenty of reasonable people – here at IESE amongst them – who know that strategy has a place within a larger context , and in practice, they maintain their general management bearings.

Does ethics have a place within strategic management?

With some good will, indeed, but as an add-on.  It can be included, ethically evaluating the ultimate purpose of the strategy or resolving ethical dilemmas that its implementation presents.  But it can also easily be omitted, perhaps leaving ethics to the business ethics course alone, saving the discussion about strategy from scrutiny.

Ricardo Currás (Dia) at IESE
Ricardo Currás (DIA)

Fortunately, today there are plenty of leaders who understand strategy’s role within a broader contextRicardo Currás, Executive Director of DIA, a Spanish company that began as a family-run shop and today is a multinational with 44,000 employees, is one of them.  In his November 15 visit to IESE he declared that he “didn’t believe in strategy” and that, “strategy is a word that has become a bit stale because it confines you to a straitjacket. Today you can’t predict the impact you will have on your company’s future. I do, however, believe in direction, in the path that may be the best to take. In addition to sketching strategic plans, we need to continually remind ourselves where we are and where we are going.”

Another great executive, Bill George, CEO of the successful high-tech medical company Medtronic based in Minnesota, defined his company as “a mission-driven company, a values-centered organization and an adaptable business strategy.”

This, I believe, should once again become the general management perspective.  Certainly we should not forget strategy.  Instead, we should emphasize a well thought-out mission centered on enduring values that can solidify over time .  Strategy should support this endeavor, not hold general management back.

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Machiavellian Management Ethics: 500 years of “The Prince”

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What is more important for business success: behaving ethically or earning a good reputation?  What then is the role of ethics in the context of business management?

For quite some time “business is business” was en vogue.  Yet the financial crisis and other scandals led us to a situation where social responsibility, sustainability and good reputation are appealing and part of any successful business. But this new trend does not give by itself an answer to our question. The point —some will say— is what we understand by success. And the answer to that takes us back to Renaissance Italy.

Until the Italian cinquecento the common assumption in Christian Europe was that eternal salvation was way more important than earthly success (power, money, pleasure). So no one dared to give a clear answer in public to our question, although almost everybody knew the unpleasant truth.

Niccolò Machiavelli, Business Ethics IESE Blog
Niccolò Machiavelli

Niccoló Machiavelli, a Florentine diplomat, gave his own response in The Prince —a little treaty written five hundred years ago and published posthumously in 1532. Antony Jay translated it into contemporary business management language in his acclaimed book Management and Machiavelli (1967).

The Prince is popularly known as an apology of fraud and manipulation in political action. But we should read it carefully. Carl Schmitt, a well know follower of Machiavelli’s political realism, once wrote: “Machiavelli, had he been a Machiavellian, would sooner have written an edifying book rather than his ill-reputed Prince.”

For sure, Machiavelli always thought religion and morals were crucial for political life. But he broke with the moral teachings of Christian tradition, stating that leaders had to learn (unlearn) how to violate morals to obtain good political results. He thus cut the link between political prudence and ethics, considering politics the science of power. This was not a mere apology of immorality, but something needed for the greater or basic good of peaceful social life: “The ends justify the means.

Weber rationalized this moral approach as the politician’s “ethics of responsibility,” opposed to the saint’s “ethics of conviction.” This has some features in common with what English philosophy called utilitarianism (closely linked to economic logics); Americans later labeled as consequentialism (so many times invoked in security and defense issues); and Germans significantly call Erfolgsethik (ethics of success).

Leo Strauss, a remarkable and original interpreter of Machiavelli, wrote “Economism is Machiavellianism come to age.”  At the end of the day the paradigm of individuals as maximizers of utility is based on the self-interest centered man of Machiavelli .

Cover page of 1550 edition of Machiavelli's Il Principe
Cover page of 1550 edition of Machiavelli’s Il Principe

But Machiavelli was aware of the importance of moral reputation. He thought that a leader should be believed as morally trustworthy if he wanted to gain and preserve power. Moreover, he fought against corruption and in favor of civic virtue. But this ancient virtue was for him only the shell of Christian virtues: He viewed the strength of the lion and the astuteness of the fox as models to be followed.

So in fact an immoral business culture is not Machiavellian at all. The current lack of trust and widespread corruption is even less Machiavellian than we think . On the contrary, social responsibility, sustainability and reputation are a perfectly Machiavellian response to the crisis. This is actually Machiavellianism at its best: successful.

So The Prince is not to be read as a handbook for political maneuvering, or as a mere defense of arbitrariness. That approach would make us incapable of understanding the lasting and deep impact of Machiavellianism in contemporary politics, and by the way, in the practice of Business Management.

Summing up, there are three elements of Machiavellianism in our current ethical landscape:

  • The stress on reputation, with no real care for actual moral behaviour
  • The centrality of success as practical criterion, and the utility of strength and astuteness for achieving that goal.
  • The narrow materialistic approach to human action (economism).

What is more important for business success: behaving ethically or earning a good reputation? What then is the role of ethics in the context of business management?

Image courtesy of Nutdanai Apikhomboonwaroot / FreeDigitalPhotos.net
Image courtesy of Nutdanai Apikhomboonwaroot / FreeDigitalPhotos.net

Machiavelli was right in many senses. The mere appearance of virtue is enough for achieving certain goals by taking advantage of necessitá (opportunities) and weathering the unforeseeable random factors of Fortuna. Aquinas himself knew that, and warned against the moral danger of corrupted forms of prudence (fraud, astuteness, deceit, etc.) precisely because they were compatible with apparent success. And classical wisdom reminds us, “Caesar’s wife must be above suspicion,” since good reputation is a moral good and even a right of the person.

So the answer to our original question depends on our definition of success. In the first instance, ethics is about defining success.

Make no mistake: We still live within a Machiavellian framework . For many of us business success is the material, measurable, earthly outcome that requires certain management abilities and the adequate administration of social legitimacy. For that reason Business Ethics should focus on re-defining success , placing management and business activity in the broader context of individual, corporate and social life considered as a whole.

Otherwise we will be assuming the Machiavellian definition of success. And that will limit the role of Ethics to an extrinsic moralizing code that has nothing to do with practice.

 

 

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