The Ethical Implications of Shareholder Wealth Maximization
"Profit is like health. You need it, and the more the better. But it's not why you exist."
-- Anonymous executive quoted in Tom Peters & Robert Waterman Jr., In Search of Excellence
ACCORDING TO PROFESSORS of finance, shareholder wealth maximization is the underlying purpose of all corporate activity. Shareholder wealth maximization (or simply, "maximization") is a comprehensive, long term financial goal reflecting investor confidence, measured specifically in the face value of a corporation's stock (Dobson, 1999; Block & Hirt, 2002). On the other hand, courses and texts in business ethics present ethical principles that function independently of--often contrary to--financial objectives. Evidently, then, there exists in most corporations a tension between financial and ethical ideals.
Halbert and Ingulli (2003) allude to a fundamental disparity between maximization and ethics in describing a study involving roughly 2,000 MBA students: "They began as relative idealists--reporting the desire to create quality goods and services, to be of service to customers, and to give back to their local communities. But by the time of graduation, they were much more oriented to goals such as maximizing value for shareholders" (p. v). Dobson (1999) has also observed the "conflict of philosophies" between wealth maximizing and any serious treatment of ethics. The economic explanation usually given to resolve this tension is belief in the free market itself, the ultimately beneficent "invisible hand" first proposed by Adam Smith in the eighteenth century (Dobson, 1999; Verschoor, 2002).
Stakeholders and Ethical Issues
A Human Resources Approach
The importance of ethics in the corporate decision making process becomes clearer upon consideration of the sheer number of stakeholders involved. Corporations, most of them offering stock in the capital markets, constitute ninety percent of total business revenues (Block & Hirt, 2002). This means that the entire American socioeconomic system is affected by the corporate decision making process. Stakeholders with an interest in these issues include the CEO and top management, middle and lower managers, public shareholders, and the employees charged with producing for the firm. Because employees are such a large segment of the corporate population, and are directly, often adversely, affected by managers' decisions, the question of corporate ethics is specifically a human resources (HR) issue.
Fundamentally at stake is the professional viability of ethical principles themselves. By most any definition, ethics involves consideration of right and wrong in decision making and policy formulation (Halbert & Ingulli, 2003). It should come as no surprise that the financial advocates of wealth maximization uphold the principle of utilitarianism-in essence, an ethical version of maximization, subject to numerical rather than behavioral analysis (Halbert & Ingulli, 2003; Verschoor, 2002). At the same time, it should be clear that the financial maximization principle itself offers no real ethical guidance in corporate governance or HR management. Ethical dilemmas therefore surface in all sorts of business contexts, especially HR contexts. Though many areas could be discussed, three are to be addressed here: managing diversity, workplace safety, and the relatively recent phenomenon of whistle blowing.
The Invisible Hand and the Visible Consequences
Of course, the apparent "moral neutrality" of maximization may be precisely why so many top managers, boards of directors and individual employees embrace it as the ultimate corporate objective in the first place--to evade moral accountability in the professional pursuit of wealth (Dobson, 1999). This easygoing indifference to ethics is based in turn on a hyper-capitalist, utilitarian assumption that the "invisible hand" of free market exchange will inevitably produce (literally) the greatest good for the greatest number (Dobson, 1999; Verschoor, 2002). By mere compliance with the market mechanism, self-interest becomes virtue. As has been suggested by the philosopher Heilbroner (1953), the popularity of Smith's theory of capitalism in the eighteenth century reflected the mood of the age, an unshakable faith in human reason and progress: "The whole complex irrational world is reduced to a kind of rational scheme where human particles are nicely magnetized in a simple polarity toward profit and away from loss" (p. 64).
Unfortunately, actual workplace realities betray this rational depiction of the business world as so many morally neutral interactions of the laws of supply and demand. If the insider trading practices of Michael Milken and Martha Stewart, or the accounting debacles at WorldCom and Enron, have taught us anything, it is that the invisible hand too often finds it way into the proverbial cookie jar. The Enron scandal in particular serves as a powerful reminder that ethics is not simply about "personal values," or technical operational issues, but about behavior that affects other people (Verschoor, 2002). Borosage (2002) argues that the consequences of corruption at Enron are as far reaching as the California energy crisis and the current lethargy of the domestic economy. Such examples are further indications that there exists a real tension between the wanton pursuit of maximization and any coherent, defensible system of ethics.
Ethical Conflicts in the Management of Human Resources
Whistleblowers and Employment-at-Will
Until quite recently one of the bedrock doctrines of the business community has been that of employment-at-will, the implicit understanding that non-contractual agreements between employer and employed may be terminated at any time, by either party, for any reason (Halbert & Ingulli, 2003; Lin & Kleiner, 2003). Halbert and Ingulli (2003) note that employment-at-will is basically a function of capitalist thinking: "The theory crystallized at the time of the industrial revolution in the United States when it became advantageous for employers to have the ability to bring on or to shed employees, depending on the fluctuating demands of the market" (p. 37). Today it is becoming more common to distinguish economic- or performance-based terminations from "wrongful discharge," or firings in violation of public policy (Halbert & Ingulli, 2003; Lin & Kleiner, 2003). Public policy, of course, is largely determined by social standards of ethics: "Because of the ethical nature involved, terminations violating public policies should be distinguished from other firing actions resulted [sic] from economic, productivity or job-performance reasons" (Lin & Kleiner, ¶ 1).
An increasingly controversial example of wrongful discharge is that involving the whistleblower, an employee who reports illicit or illegal activity on the part of his/her employer. Wrongful discharge statutes protecting the whistleblower have appeared in the legal codes of a handful of states, for example Montana (Halbert & Ingulli, 2003). The public is slowly coming to the realization that the free market ideal of employment-at-will does not mean insulation from wrongdoing or exposure. This change in public attitudes toward the whistleblower mirrors a welcome change in management philosophy, from a traditional "bottom line" results orientation to one that openly incorporates ethical and human resource approaches (Lin & Kleiner, 2003).
On the other hand, there can be no substitute in a free market economy for basic managerial autonomy in hiring and firing decisions, efficient operational procedures, and systems of employee accountability. Excessive regulation and oversight stifles innovation and incentives. The criteria for deciding what exactly constitutes "public policy"--other than simply citing a large body of existing law--must therefore be rigorous and consistent if businesses are to maintain any rights of their own (Halbert & Ingulli, 2003). Perhaps the best criteria are ethical principles rather than legal statutes. Managers might be pleasantly surprised if they were to view whistle blowers as real people with real concerns, and their claims as potentially useful sources of information. Indeed, such an approach would likely eliminate the need for anyone to "blow the whistle" in the first place (Lin & Kleiner, 2003).
Workplace Safety and the Bottom Line
Maintaining a relatively safe working environment obviously has everything to do with ethics, though ethics unfortunately does not always figure into a company's policy on safety. Because too often employers acting on self-interest have failed to ensure even a minimally safe environment for their workers, the federal government has stepped in with far-reaching regulatory bodies like the Occupational Health and Safety Administration (OSHA). Worker safety is yet another arena of public discourse in which capitalist economic principles tend to oppose the interests of employees: "Free-market economists believe that government regulation tends to stifle competition and detract from efficiency, reformers that we must look to government to reign in the negative effects of unrestrained capitalism and to protect the public from its harshest excesses" (Halbert & Ingulli, 2003, p. 161)
Free market economists are correct, of course, to argue that OSHA regulation presents more difficulties to managers than non-regulation. They rarely suggest what the policy alternatives ought to be, or what might be the consequences (Estes, 2002). Their protests illustrate again what common sense would suggest--the impotence of the invisible hand when it comes to ethics. Over 5.7 million workplace injuries and illnesses were reported in 1999 alone (Halbert & Ingulli, 2003)-sufficient evidence that operation of the free market is itself incapable of upholding effective safety standards. An obsession with the bottom line and the pleasure of shareholders results frequently in neglect of, even mistreatment of, human resources (Estes, 2002). In the absence of ethical self-monitoring on the part of businesses, workers' compensation law is at least one way to strike a reasonable balance between a free (but hazardous) market and excessive regulation and litigation (Halbert & Ingulli, 2003).
Diversity and Discrimination
In a sense, the Civil Rights Act of 1964 stands as historical testimony to the questionable ethics of maximization. Despite assurances from well-meaning capitalists that the market can and will right all wrongs, it took social upheaval and a landmark act of Congress--actually a series of such acts--to put an end to legal discrimination in the workplace (Halbert & Ingulli, 2003). Though some questions remain as to the moral legitimacy of subsequent related acts, especially Affirmative Action initiatives, scarcely anyone questions the moral legitimacy of equal opportunity itself. "There is little disagreement that the racism and sexism that excluded women and minorities from competing for the best jobs and admission to the best educational institutions are immoral practices" (Wall, 2003, p. 206). One wonders, then, just how long it was going to take for the invisible hand of the market to catch up with Martin Luther King, Jr., John F. Kennedy and Lyndon Johnson.
On a related front, it could be argued that "the market" has yet to understand the ethical problems of sexual harassment. Unwanted advances, implicit quid pro quo arrangements, and ongoing hostility are facts of life for many women in the contemporary workplace (Halbert & Ingulli, 2003). Though there are Equal Employment Opportunity Commission guidelines and other legal statutes in place to mitigate the situation, such laws have proven terribly difficult for women to uphold in the courts. Because the woman is the plaintiff in most sexual harassment cases, she bears the legal burden of proving both male malice and female unwelcomeness, intangibles difficult to demonstrate to a judge or jury (Halbert & Ingulli, 2003). It follows that neither the market nor the law have been of much service to professional women, which amounts to another reason to promote ethical as well as economic principles in business administration.
Evaluation and Alternatives
The Failure of Utilitarianism
If the Golden Rule of Christ, Kant's categorical imperative, and Aristotle's ethics of virtue have any merit, then any system that tramples upon the rights and dignity of individuals is an inherently unethical system (Wall, 2003; Halbert & Ingulli, 2003). That premise is broadly recognized when applied to communist dictatorships and even a few overtly corrupt corporations such as Enron. However, much evidence indicates that the market itself, when directed strictly by individual self-interest, is an equally unethical system. Positive aggregate economic trends and promising financial metrics are no substitute for ethics at a personal level.
That leaves a sort of blind utilitarianism as the only ethical justification for the theory of maximization: "When a defense of this objective is offered, it is invariably grounded in the concept of the invisible hand: Each individual firm competitively pursuing shareholder wealth maximization leads ultimately to maximum aggregate economic benefit" (Dobson, 1999,¶ 8). Not surprisingly, utilitarianism speaks the language of finance rather than moral principle in producing "the greatest overall good": "Cost-benefit analysis, the sort of efficiency calculation that is common to business decision making...is based on notions of utility" (Halbert & Ingulli, 2003, p. 19-20). The utilitarian approach suffers a number of theoretical weaknesses, among them the near impossibility of calculating outcomes from decisions and the subjection of minorities and other unfortunate individuals to policies deemed to benefit the "greatest number" (Wall, 2003; Halbert & Ingulli, 2003). Worse yet, the invisible hand cannot embrace ethical utilitarianism, for the simple reason that free market economic systems are not free moral agents.
The Law and Ethics
Sooner or later, corporate executives have to realize that compliance with the law is not equivalent to ethical behavior. Finance professors Block and Hirt (2002) acknowledge that "certain socially desirable actions such as pollution control, equitable hiring practices, and fair pricing standards may at times be inconsistent with earning the highest possible profit or achieving maximum valuation in the market" (p. 13). Part of their proposed resolution to the dilemma is legislation, so that "certain cost-increasing activities may have to be mandatory rather than voluntary, at least initially, to ensure that the burden falls equally over all business firms" (Block & Hirt, 2002, p. 13). The very fact that managers must be dragged against their will into socially acceptable behavior is evidence that their pursuit of wealth is often unethical.
Halbert and Ingulli (2003) point out the critical distinction between law and ethics: "While law concerns what we must do, ethics concerns what we should do" (p. 1). Whether ethics of deontology, virtue or even utility, these matters involve conscious deliberation over right and wrong-as opposed to passive resignation to the will of the market and grudging obedience to the law. Verschoor (2003) argues that the choice presenting itself before corporate accountants, for example, is between moral and technical decision making. What was true for the New Testament church still holds for today's business community: The letter kills and the spirit gives life.
Alternatives to Maximization in Management
Valuing Human Resources
From what has been suggested here, there are no easy institutional or legal fixes to the problem of unethical behavior in the pursuit of maximization. Ethics is about hard choices, and the decision to forgo a measure of wealth in order to pursue a right course of action may prove anything but easy for a corporate manager. Nevertheless, there seem to be some means available for smoothing the transition to an ethically oriented approach.
First of these would be the recognition of human resources as the most valuable asset available to the business. Too often economics reduces workers to "labor units," i.e., impersonal "factors of production." This way of thinking leads to indifference or even contempt for the human element: "In the traditional management style, or the so-called 'mechanic' style, executives are authoritarian and often strongly emphasize results but demonstrate little concern for the means used to achieve results" (Lin & Kleiner, 2003, ¶ 17). Above land ownership, financial capital, or plant and equipment, human resources are the ultimate means of production. Without workers doing what they do best, an economy will shrivel and die regardless of what other resources may be available to it.
Embracing Personal Virtues
If market mechanisms and legal statutes are insufficient to produce ethically acceptable changes in the corporate workplace, the time has probably come to revisit Aristotle's vision of ethics as personal virtue. According to Whetstone (2001), virtue is an internally produced state of character residing in the individual. Unlike utilitarian or even deontological ethics, embracing virtue allows right decision making at the personal level--regardless of how it may or may not maximize the bottom line or financially benefit the majority (Whetstone, 2001). When balanced against more "act" oriented utilitarian theories, virtues can make managers more or less ethically equipped--that is, able to see possible long-term and wide-ranging consequences--and at the same time sensitive to the issues of moral behavior and how it affects others at the personal level (Whetstone, 2001). Though this expanded perspective will not eliminate moral dilemmas, it will enable managers to at least understand what is important and make informed, ethically responsible decisions.
Communicating Corporate Values
Most business leaders are familiar with the concept of company values, and their impact on organization culture. However, corporate values also help guide personal decision making for both managers and employees. Culture defining values do not simply transmit themselves throughout an organization because they are decreed on paper, but are most effective when "democratically derived" (Whetstone, 2001), or sincerely shared by the various stakeholders within and outside the organization. Indeed, expanding the business objective to consider the interests of all stakeholders and not merely the narrow financial aims of shareholders has proven ultimately profitable (Estes, 2002). The author's employer, Home Depot, enumerates eight "core values," in which the traditional aim of "Increasing Shareholder Value" is balanced by other principles such as "Taking Care of Our People" and "Doing the Right Thing." When employers take such values to heart and communicate them effectively, the result is a win-win situation: "As problems are avoided through more responsible decisions at the source, stakeholders win by suffering less monetary problems from defective and shoddy products, less harm to health and safety, less damage to the environment" (Estes, 2002, ¶ 21).
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