“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game,” Nobel Prize-winning economist Milton Friedman wrote in 1970.[i] The leader’s job, according to Friedman, is to maximize profits (within the bounds of the law), with no concern for worker happiness, discrimination, customer satisfaction, the local community, or the environment. The only reason to pursue improvements in these other realms would be to increase profits.
As Friedman’s perspective developed into a social movement within the field of economics, many academics taught students at business, government, and law schools that leaders have a legal obligation to maximize profits over concern for other socially responsible motives. Of course, this was never actually the law; it was simply Friedman’s opinion. There are many other views regarding leaders’ ethical obligations, many of them rooted in intellectual traditions established long before Friedman came to the fore.
In fact, Friedman’s view defied a long history in philosophy that spells out what constitutes moral behavior. Ethicists have typically defined morality as what is best for the broader community, society, or world. One influential perspective on ethics is called utilitarianism, a view rooted in the work of Jeremy Bentham and developed by John Stuart Mill, Peter Singer, and others. Utilitarianism suggests that ethical behavior is that which maximizes collective value, rather than just the value of an individual, organization, or a select group of shareholders. While many philosophical perspectives differ from utilitarianism, most ethical philosophies believe in valuing a broader set of concerns than just the profitability of the corporation. There is much that leaders who adopt this broader perspective can do to create ethical organizations and, in the process, a better world.
Confronting Ethical Challenges More Deliberatively
When leaders read about egregious cases of corporate wrongdoing in the media, such as recent stories involving Theranos and Purdue Pharma, they often infer that such ethical breaches are unlikely to occur in their organization. After all, they view themselves and their employees as good people. This assumption is rooted in the fact that journalistic accounts typically focus on the “bad apples” involved in tragic events and corporate crises, such as Elizabeth Holmes of Theranos and the Sackler family at Purdue Pharma—a focus that obscures the blame that the rest of us deserve for contributing to a problem. In fact, the vast majority of unethical behavior in corporations occurs without anyone’s conscious intention to behave unethically.
To understand how ethical decisions come about, it is helpful to a consider the difference between our two basic types of thinking, System 1 and System 2.[ii] System 1 is fast, automatic, effortless, implicit, and emotional. For instance, when we interpret verbal language or visual information, we do it automatically and unconsciously. Our immediate reactions to a person, a product, or an idea also reflect System 1 thought. By contrast, System 2 employs more deliberative reasoning; it is slower, conscious, effortful, explicit, and logical.
For most decisions in life, System 1 is sufficient; it is speedy, efficient, and often quite accurate. It would be impractical to invest the time and attention required for System 2 deliberation when making trivial decisions. Unfortunately, however, we tend to overly on System 1, which leads to common cognitive biases, such as overconfidence, that steer us toward poor decisions—including unethical ones that deviate from our personal moral standards.
In other words, cognitive biases allow nice people to engage in unethical behavior without realizing that they are doing so. Recent research on bounded ethicality identifies the magnitude and causes of these behaviors, which occur without awareness.[iii] Bounded ethicality encompasses psychological processes that lead people to engage in ethically questionable behaviors inconsistent with their own preferred ethics. It allows leaders to make decisions that not only harm others but are also inconsistent with the leader’s conscious beliefs and preferences.
One example comes from Swedish retailer IKEA. IKEA’s executives were good people who were justifiably proud of the many ways their customers benefited from the company’s ability to provide quality goods at low prices by buying from efficient low-cost producers around the world. That picture of capitalistic virtue was complicated in the mid-1990s when IKEA executives learned that children were making some of the rugs the company bought in India. When faced with such situations, many companies are reluctant to impose themselves on the local decisions and business practices of their suppliers. But profiting from child labor was in conflict with IKEA’s values. IKEA sought to address the problem, in part by helping to improve the financial independence of women (the children’s mothers) in India’s “carpet belt.”[iv] While the executives had ignored available knowledge about their use of child labor for an extended period of time, when they were prompted to deliberate, they moved toward decisions that better reflected the company’s larger interests.[v]
Fairness Concerns and Perspective Taking
Part of being a responsible leader requires simple notions of fairness, and thinking about what others will think is fair. How will customers perceive a rate increase? How will employees respond to wage freeze? How will the employees in an organization that we acquire respond to the integration? Leaders need more deliberative thinking to think clearly about these fairness concerns.
Research on an economic game called the “ultimatum game” sheds light on this dilemma and how leaders can avoid it.[vi] The BBC podcast “The Philosopher’s Arms” recreated the game using two audience members as participants.[vii] The host explained that he had 86 British pounds available to give to the two participants, but only if they agreed on how to divide this sum between them. Under the rules, one of the participants was to divide the 86 pounds, and the other participant could accept or reject that allocation. If the second participant accepted, the money would be divided as the first participant offered. But if the second participant rejected the allocation, both parties would get zero.
Imagine you’re the second participant. You might expect the other player to offer you 43 pounds, an even split. Instead, they allocate 76 pounds for themselves and 10 pounds for you. Would you accept this split? If you are like most people, you will reject it, though this decision is inconsistent with economic rationality – after all, 10 pounds is better than nothing. Many would reject the 10 pounds because you don’t want to accept an unfair allocation or allow the other player to benefit from exploiting you. You might even argue that you are doing society a favor by punishing the other player for making an unfair offer. For many people in this situation, fairness concerns factor into their decision.
One of the key tasks of a leader is to think about how others will respond to your actions. For Participant 1, this would mean anticipating that a 76-10 split (or a 85-1 split) would anger their partner. Taking Participant 2’s perspective should lead Participant 1 to recognize the likely role of fairness concerns in their decision making and the need to be more generous to earn their cooperation.
This game may sound contrived, but we play a version of it with the same underlying structure every day. When we consider buying something at a store or website with a posted price, we are put in the position of deciding whether to accept the store’s ultimatum. If you value the item more than what it costs, you may decide to buy it, but you are not invited to negotiate with the store clerk about whether you think the broccoli is really worth what the store is charging for it; the store has given you an ultimatum. Social comparisons and the emotions they trigger have a stronger impact when we evaluate a single option than when we compare two or more options at the same time.
The same is true when leaders make decisions about employee wages. In nonunionized environment, wages are often presented as an ultimatum – you can take what is offered or seek alternative employment. Leaders would be wise to think through how employees will perceive and act on what they perceive as the fairness of such an ultimatum.
The rest of this editorial will be published at a later date.