What is Corporate Ethics anyway?

Does ethics matter for corporate performance? There is a lot of empirical evidence that supports this. A number of studies have confirmed that a companies’ ability to construct a good ‘ethical climate’ has an identifiable influence on its business and financial performance. While this is well known, and while it is becoming a central tenant of contemporary discussions of Corporate Social Responsibility, it is much less clear how this works. The general idea is that ethical conduct is supposed to generate a positive reputation. Such a positive reputation is then supposed to enhance firm performance, wither directly by improving relations to customers, suppliers or other stakeholders, or indirectly by making investors more view the company in a more favorable light, thus facilitating access to capital. But all of this is mostly assumption. We really know very little of how this works. How do stakeholders’ really react to corporate reputation? How do investors factor in reputation in their decisions? How is reputation created, particularly in the new ‘viral’ environment of online communication? How does reputation relate to ethics?

This research project aims at answering (some of) these questions. But first we need a better definition of the terms that we are using. First out, ethics, what does this mean in a business context?

Arguably, one of the most important transformations of the business world in recent years has been the growing importance conferred on ethics and Corporate Social Responsibility, in practice as well as in rhetoric. This visible in the numbers. During the 1990s, US corporate spending on philanthropy and other ’cause related marketing’ increased by more than 500 per cent, and arts sponsorship showed similar figures[i]. As a result most large companies now claim to be socially responsible, and a growing number publicly list their ‘values’ – although these often tend to be more or less identical versions of the standard mantra of ‘Integrity’, ‘Commitment’, ‘Trust’, ‘Honesty’, ‘Innovativeness’ and, lately, ‘Sustainability’- and claim that such values are what really motivates their actions, above and beyond the profit motive. Indeed the focus on ethics, along with the recent emphasis on authenticity and meaningful experiences, can be said to be central to what French sociologists Luc Boltanski and Eve Chiapello identify as a ‘new capitalist spirit’, particular to the information economy[ii].

However the most important transformation has been qualitative: we have seen a gradual – accelerating in recent years- shift in the ways in which Corporate Social Responsibility has been conceived, by business actors as well as management scholars. In its first heyday in the 1960s, Corporate Social Responsibility was mainly seen as a matter of ‘Doing Good’; it was about spending money on some favorite charity, out of benevolence, ideological affinity or caprice. Such measures were a matter of expenditure, not investment. They did not come with any particular business plan attached to them. At the most it was thought that expressions of benevolence could increase the legitimacy or community standing of the company and thus serve to fend off critique or attacks from social movements. But companies saw no direct returns- to them or to their shareholders- from measures like funding a university or supporting the local community library. It was these kinds of measures that Milton Friedman (perhaps rightly) criticized as beyond the point of the profit-maximizing business of business. Today, however, Corporate Social Responsibility is increasingly considered part of business practice, part of ‘doing well’. In other words, even the favorite charity must show that it actually contributes to furthering the contributing company’s business model. Or rather, Corporate Social Responsibility is less simply about giving money to charity and other forms of philanthropy (although this still has a place) and more about managing the company’s relations to investors, workers, consumers, and other stakeholders in ways that contribute to overall business performance. (A charitable organization, or more generally an NGO can play an important part in such stakeholder management, by insuring, for example that practices that would upset certain stakeholders, like child labor for example, are kept out of the supply chain. Consequently we have seen a substantial rise in the cooperation between large corporations and NGOs.) Emerging in the late 1970s, the notion of social responsibility as stakeholder management underlines the importance of achieving maximum overall cooperation between the entire system of stakeholder groups and the objectives of the company. In other words, the ethical ideal of good conduct becomes redefined as a matter of maximizing the value of the relations that make up the corporation and its immediate environment[iii].

When the Stakeholder Management perspective gained ground in the 1980s it was a reaction to two important tendencies. First, the growing social imprint of business. In part this came from ever more vigorous social movements and other actors who put increasing pressure on business, and brought into the public light, and questioned its unjust or environmentally unsound practices. In part it resulted from the extension of value-chains made possible by early developments of information and communication technologies, and the resulting involvement of ever more stakeholders that this brought about. Companies’ external relations became ever more complex, and their perceived importance to value- creation increased: Thus these external relations required new forms of management in their own right[iv]. Second, the 1980s saw a growing importance of the Resource Based View of the Firm in managerial thought. Central to this perspective was that companies achieve sustainable competitive advantage not necessarily by dominating the market, but by being able to capitalize on their own unique resources. It soon emerged that the most important of these assets were the kinds of resources that emerged out of complex forms of social interaction among the firms employees, customers and other stakeholders, because such social or ‘knowledge based’ resources were, by their very intangible nature, difficult for competitors to imitate[v]. In other words, the growing importance of ethics, and its implicit redefinition as the management of relational value (rather than mere benevolence) emerged as a response to a growing awareness of the unique value that could be derived from the relational resources at a firms disposal, or, what sociologists had begun to call ‘social capital’.

So what we are seeing here is a rather radical re-definition of the operational significance of ethics in business. With the business ethics tradition, we are used to view ethics as a matter of doing good, of behaving morally. But in contemporary business practice, ethics actually creates value in different ways, by building virtuous relation or community. On other words we are closer to the classic Aristotelian definition of ethics, than to the modern Kantian (or Christian) understanding. Ethics is a matter of building the virtuous relations that can sustain a common enterprise, a koinonia.

The growing importance of ethics in this new (old) relational sense results directly from the opening up of corporate organizations towards a plurality of value-generating practices that are located beyond the reach of their bureaucratic chains of command. Building a virtuous relational ethos becomes a way to give common direction and coherence to a productive process that builds on a large network of external actors and resources, like suppliers, consumers, public opinion and the creativity of employees. This way, the rising importance of ethics can be understood to be a central component to the reconfiguration of the productive processes that stand at the core of the information economy.

[ii] Boltanski, L. & Chiapello, E. 1999. Le nouvel esprit du capitalisme. Paris, Gallimard.

[iii] Vogel, D. The Market for Virtue. The Potential and Limits of Corporate Social Responsibility. Washington (D.C.); Brookings Institute Press.

Frederick, W. C. 2006. Corporation Be Good! The Story of Corporate Social Responsibility. Indianapolis (IN); Dog Ear Publishing.

[iv] See Emshoff, J.R. & Freeman, R.E. 1978. Stakeholder Management. Working Paper from the Wharton Applied ResearchCentre, quoted in Garriga, E. & Melé, D. 2004. Coporate Social Responsibility Theories: Mapping the Territory. Journal of Business Ethics, 53, pp. 41-51, cf. Sturdivant, F.D. Executives and Activtists. Test of StakeholderManagement. California Management Review, 22, 1979, pp. 53-59.

[v] See Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management, 5, pp. 171-180.

Bowman, C.& Ambrosini, V. 2000. Value creation versus value capture: Towards a coherent definition of value in strategy. British Journal of Management, 11, pp. 1-15.

Coff, R.W. ’1999. When competitive advantage doesn’t lead to performance: The resource-based view and stakeholder bargaining power. Organization Science, 10 (2), pp. 119-133.