One has to dare to face it: the usage of Principle-Based Ethics (PBE) to ground Corporate Social Responsibilities in a measurable and effective way has largely been contradicted by historical facts and by many scholarly based studies.
At a philosophical level, there seems to be confusion between market/societal expectations, ethical principles, and the measurements of the latter: these three elements are often not correctly separated and interrelated.
In this essay, it will be shown that the deepest roots of this misleading route lay in a lack of comprehensive understanding of the deep nature of what a business organization is as it shows in the following classical approaches of this subject: (1) applying roughly human ethical standards and concepts to organizations, being content with metaphors valid for the former applied to the latter without checking their actual meaningfulness; (2) forcing a guileless connection between Financial Performance (FP) and Corporate Social Responsibility (CSR) without any explicit explanatory model of why it should be like that; (3) underestimating the difficulty of applying rules and procedure in an organizational environment build up with and around free-willed humans; (4) “static” understanding of organizational compliance to human and social ethical expectations, largely missing the longitudinal dynamic dimension and predictivity.
This paper’s philosophical premise is that before establishing what an ethical behavior for a business organization ought to be, one has to understand its nature, as any external or internal influence moving it away from its natural characteristics will wrongly warp its behavior and lead to unwanted results from an ethical standpoint.
Starting from an explicit dynamic model of organization’s evolution established in thermo-economics, it will be shown which organizational behaviors will participate positively to the organization’s environment really adding value and which will have a negative impact, allowing the highlight of a set of desirable organizational principles.
It will be shown that these principles are a non-metaphorical analogy of human virtues applied to an organization: hence, this will facilitate the formal bridging between these principles and the human and societal expectations about business organizations’ behaviors and the establishment of new measurement criteria.
At the dawn of the XXI century, TYCO and ENRON in 2001, WORLDCOM and ADELPHIA in 2002 scandals related to clear governance misbehaviors were exposed to public contempt and their incidence on the public debate has signed the decree of death of the naïve belief that the sole responsibility of corporate officials is to maximize shareholders’ dividends (Milton Friedman, 1962) and that the Adam Smith’s invisible hand in “The Wealth of Nations” (Book IV, Ch. II) would provide for the best of all civil society.
Thus, a new season started where, mainly under the pressure of governments and public opinion, new laws, policies, rules, and regulations appeared (e.g. Sarbanes-Oxley Act in 2002), in order to frame up the businesses relationships with the various stakeholders. This period of time has seen flourishing a deontological surge of Codes of Conducts, Codes of Ethics, Statements of Purpose, etc., all of them aimed at reassuring all the stakeholders about the intentions of the promulgating business organization through some kind of “Compliance”.
Unfortunately, less than an economic cycle later, a new series among human history’s most outrageous economic scandals, blew up: the most infamous among which have been LEHMAN BROTHERS in 2008, GOLDMAN SACHS in 2010, J.P. MORGAN in 2011, and APPLE-FOXCONN in 2012, PEPSICO along the whole last decade, BP with Deepwater Horizon, VOLKSWAGEN in 2015, and the list is currently unending.
This time, the naïve trust in public opinion that a “Compliance” based approach to business ethical behavior would reduce the risk of having governance’s level misbehaviors has been wiped away. Even if laws, rules, and regulations were established and even if officially published and top management formally supported codes of conduct were more or less actively promoted, these scandals have shown that deontological compliance was not, by far, sufficient to regulate organizations and individual behaviors nor to convey, internally and externally, truthful information about the organizations’ actual business ethical commitments and practices. Besides, the extent of the consequence of unethical, though often lawful, acts perpetrated under the shelter of a code of conduct umbrella have had the direst consequences not only at the national but also at global levels, like the current economic crisis, lightened up by the sub-prime financial scandal in 2007, still continues to show though now overshadowed by the Covid-19 worldwide current crisis.
As widely known, the debate about ethical behavior among scholars specialized in management, organizational, quality and regulatory issues did not start with reflections about Goldman Sachs’ ethical implications (Mogielnicki and Jeffers, 2010) or the fine lines between illegality and unethical behaviors (Morgenson and Story, 2010) but is ancient and roots in philosophical considerations discussed since millennia of human thought (Bragues, 2008).
Currently, some scholars have been as far as preaching that, not only ethics is a central task of management, but that, actually, it is the task of management itself (Buchholz, 1989). Others have observed that ethics is fostering a language of excellence vs. a language of effectiveness (Horvath, 1995) or even that quality excellence-driven processes have little meaning without an ethical culture supporting them (Maguard and Krone, 2009).
The complexity of the topic is grounded in the fact that ethics is an organizational issue as well as a personal one (Whetstone, 2005) and often at the nexus between politics and corruption (Rodriguez et al. 2006) hence any comprehensive analysis and proposal must encompass at least these two dimensions simultaneously. Being ethical means taking managerial actions so that practices and rules are applied consistently (Ormes and Ashton, 2003): it requires managerial excellence (Whetstone, 2003).
Additionally, other studies have shown how societies living of expediencies unrelated to ethical behaviors lead to huge costs (Ahmed and Machold 2004)) or how the costs for the companies, their stakeholders, and the civil society are high when unethical behaviors do appear (Karpoff et al., 2008).
Conversely, other authors have stressed how an “ethical discourse” may have, as side perverse effect, to actually appear to even rationalize unethical behaviors among managers (Bird & Waters, 1989), while others are denouncing the high cost and, yet, the inefficiency of a regulatory approach in the close past (Rossi, 2010) or even stress how Business Codes alone are per se definitely not effective (Kapstein et al., 2011) showing how ineffective these have been to stop top management misbehaviors (Ali, 2009). A latter heuristic study of Mohammed (2013) confirms the poor correlation between official CSR initiatives and the actual strategic outcomes
This has led to an epistemological issue where, in the good-intentioned desire to convince market operators and companies’ top management, some scholars have tried to “demonstrate” the goodness of a deontological compliance-based business ethics approach by applying teleological argumentations like the existence of improved financial results on the medium and long term compared to companies who do not engage ethics formally. This is the last straw: trying to demonstrate that deontological principles are good following a teleological argument is an obvious contradiction in terms.
The financial impact of CSR activities has been the aim of a congruent set of literature (Marom 2006, Waddock, 2004, Baron, 2001): some studies like Berman et al. (1999), Cochran and Wood (1984), Hillman and Keim (2001) seemed to show a positive relationship between Social Performance and Financial Performance (Quasi and Richardson 2014; Garcia-Castro et al, 2010) including the investment improvement seen as increased shareholder value (Cajas et al. 2014, Lundgren, 2011; Kang et al., 2010) while others had more ambiguous diagnoses (Peloza and Papania, 2008) or even noticed some negative impact (McWilliams and Siegel, 2000). Margolis and Walsh (2003) noticed that over 100 studies, barely only half were showing a positive relationship while in the other half the correlation was at least insignificant if not ambiguous: Orlitzky et al. (2003) reached a similar conclusion on a meta-analysis of 51 studies
Authors like Reinhardt and Stavins (2010) or Campbell (2007) have been investigating the correlations between economic CSR decisions and their positive impact on CSR investments taking into account third-party governmental or non-governmental organizations’ influence.
In our opinion, all these approaches hold in a conceptual issue insofar they limit the goodness of business ethics solely to better financial results without taking into account their radical otherness as the fact that, e.g., the first is diachronic by essence while the second is fundamentally synchronic by nature: Ogden and Watson (1999) demonstrate how stakeholders sound management can over a 10 years period do show a negative impact on current profitability though a long-run positive impact for the shareholders.
Till very recently Boesso et al. (2013) used KLD data and linked to Global reporting Initiative data to probe the relationship between CSR and Corporate Finance (CP): they categorized three possible CSR corporate strategies, namely descriptive, which we call in this study deontological, instrumental which we call teleological and strategic which is closer to our notion of metaphorical virtuous behavior and found out that, as expected by us, the first one has no impact whatsoever on the CP, while the second has short term impact and the last one a mixture of short and medium-term impact. Their study limits it period of investigation to the years between 2005 and 2007 avoiding the financial crisis of 2008-2010.
All these points have led to a methodological impasse at a practical demonstration level as already stated by Post et al. (2002): “The softest generalization…. Is that there is no empirical evidence “of a positive correlation between Social and Financial Performance”. Actually, Garcia-Castro et al. (2010) show evidence that this demonstration is impossible to be performed as top management decisions about Social Performance are endogenous and too correlated to unobserved firm’s specific variables. At the same time, D. Wood (2010) reached similar conclusions asking to move away from the previous decade of research and, instead, to extend argumentations to and from other fields of research grounded in different perspectives and epistemic contests.
As a result, we must face the fact that, insofar compliance-based ethics, which we also call deontological ethics, has not yet demonstrated neither practical positive achievements in the field nor its success has been measured with serious epistemological grounding and that teleological-based ethics has blatantly failed to answer to the society’s needs at local and global level during these last 20 years, it is henceforth urgent to explore new paths to establish better grounded ethical measurable approaches, both on scholar’s and practitioner’s sides.
Hackett et al. (2012) do also recognize “the failure of regulations, code of conducts and various audits to curb the wrongdoings of contemporary leaders” and they recommend management researchers to be back studying leaders’ virtues as “the study of virtues is still in its infancy”. Actually, virtues have been implicit in previous studies looking about future directions for leadership studies (Brown and Trevino, 2006), relationships with social responsibility and subordinates (De Hoogh and Den Hartog, 2008) or relationships between change and leadership (Zhang and Ng, 2009) implicitly confirming that there are strong correlations between top management values and socially oriented policies (Agle at al., 1999).
Even though the virtue theory may offer a kind of loophole to the compliance’s ethical approach impasse, the issues related to the measurement of desirable firms’ and leaders’ ethical behavior are still in their infancy though the need to solve them is more and more severely perceived (Waddock, 2004) with requests of establishing measurement instruments which are transparent, reliable and construct valid (Rahman and Post, 2012). Tentative in this direction are considerations about how to classify codes of Business Ethics (Gaumnitz and Lere, 2004) along the length, focus, tone, level of detail, shape, thematic of construct, or to measuring corporate and social and environmental performance at the product level (Gauthier, 2005). The existence of companies’ Social Performance (SP) private databases like the Kinder, Lydenberg, and Domini (KDL), do partially help the researcher like Dhaliwal et al. (2011), Ghoul et al. (2011) in the domain of CSR related cost of capital to test models but are considered on one side as not transparent about their data’s acquisitions processes and often presenting somehow not very consistent data (Semernova, 2010).
On the other side the mistaken idea that one can make business decisions independently from ethical considerations (Friedman, 1962), known as “separation thesis” (Harris and Freeman, 2008), is the root of the counterpointing position that it is impossible to actually separate them and the way scholars found to trying to convince corporations’ leading teams was to enter into a teleological kind of explanation trying to discover some (positive) relationship between CSRP and FP.
The question on how to relate and measure ethically desired behaviors with the expected firms’ and persons’ virtues remains therefore totally open and severe in its epistemological contest.
We can, now, summarize the issues described above in the following list of unanswered questions in the literature:
I1: Business is something that is universally considered beneficial for humanity, as it provides work, increases wealth, expands relationships’ networks. How is it that one needs to add additional rules and obligations to something intrinsically good?
I2: How is it that, from a methodological point of view, one wishes to measure how good is the behavior of a company and not, more logically taking into account I1, measuring the accidental bad behavior instead?
I3: If one assumes that for meta-economic reasons, like social ethics or politics, one needs to add extra rules and regulations, what would justify the search for additional positive economic impact? What does justify that added regulations on ethical behaviors desired by society should lead to better financial returns?
I4: As a consequence of I3, how does it make sense from a methodological and theoretical standpoint to try demonstrating how savvy it is to comply with a deontological framework which is rooted in ethical beliefs by using teleological argumentation in showing how economically efficient it is?
I5: Why is it so difficult and so expensive to comply with deontological codes of conduct and other ethical charts and new law and regulations forcing a specific behavior?
I6: Finally, down the road, what does it mean to be ethical for a corporation?
I7: Once established what being ethical means, are there ways to measure in a reliable, valid, and transparent way how unethical can be the contingent behavior of a company?
To solve the 7 mentioned issues here above we suggest the following pathway:
Step 1: To define what ethical behavior is
Step 2: To clarify under which conditions this notion of ethical behavior can be extended to corporations’ behavior
Step 3: To establish some measurements able to capture the essence of an ethical corporation’s behavior
Step 4: To experimentally validate the measurements in a causality-controlled context
Step 5: To critically evaluate how well the 7 above mentioned “I” issues are solved