A plea for ethically oriented corporate management
Stefan Kern, Member of the Board of Managing Directors, Volksbank Trossingen eG
I. Introduction: An economic system at a crossroads?
Over the past few years, a feeling of unease has spread among large parts of the economy and, particularly, into the financial sector. This unease results in fundamental questions that are substantiated by concrete crises and scandals, above all the financial market crisis that started 2008 and whose consequences continue to this day. These questions shake formerly undisputed truths: Is infinite economic growth sensible or possible against the background of environmental risks and climate change? Does economic growth really create new jobs and prospects even in times of changing demographics and digitalisation? Are free and unlimited capital markets really conducive to the economy as a whole or will financial products and their trading without a so-called “real economic” link harm economy and society?
This system criticism reached a peak with input from an unusual, but very prominent influence: In his apostolic letter “Evangelii Gaudium“, Pope Francis wrote: “This economy kills”. The reflexively defensive reactions by members of the financial press to this statement mostly (and rather deliberately) overlooked the fact that the head of the church obviously did not criticise the (social) market economy as such, but a largely unregulated economy, i.e. a laissez faire without effective constitutional and social structures. The pope succeeds in precisely describing the latter system. Thus, the apostolic letter is regarded as a warning to combat effectively and decisively such tendencies in Europe and in the world. In addition, the slogan and the Pope’s criticism can be used as allegories for a financial system that has gone off the rails and – at least in part – increasingly revolves around itself and loses sight of its own purpose in business.
Particularly the younger generation formulates its desire for new entrepreneurial methods that entail social or ecological change. For example, in a survey by the “Bundesverband Deutsche Startups“, around 30% of the founders stated that they pursue a goal of the “Green Economy” and “Social Entrepreneurship”. In a (representative) study by the coaching platform “BetterUp” in the USA, nine out of ten employees stated that they would prefer meaningful work over a higher salary. Now, even high-ranking representatives of “big business” demand of enterprises to commit themselves more strongly to society: In a letter to various corporations, Larry Fink, CEO of BlackRock, pointed out that “society is demanding that companies, both private and public, serve a social purpose”. In order to prosper in the long term, every company needs not only to provide a financial service, but also to make a positive contribution to society. Everyone must benefit: Shareholders, employees, customers as well as the community in which a company operates. Otherwise, a company could lose its “licence to operate”.
The central question remains: What is the point of the wish or the request that companies should commit themselves socially, or even align their actions and goals with a social and ecological sense and purpose? This essay looks at its general practical relevance and orientation, but with a particular focus on financial services.
II. What is the purpose of an enterprise – a brief analysis
1. The sole responsibility of an enterprise: making a profit?
During a panel discussion at an event of Die Deutsche Wirtschaft (DDW), philosopher Richard David Precht and President Ulrich Grillo of the Bund Deutscher Industrie (BDI) exchanged their views on the question of what the tasks of business and an enterprise are.  Quite surprisingly, the philosopher insisted that a business had solely the task of making profits, which in itself he deemed neither ethical nor unethical, while the business representative stressed that the economy had to serve society and increase its prosperity. Long-term success could only be achieved if a value-oriented, ethical attitude was reconciled with an economic goal of making a profit. As charming as the BDI Chairman’s remarks are, they do not coincide with the framework conditions of the current economic system:
According to the prevailing view in business administration, the principle of economic activity, i.e. the achievement of the greatest possible profit on the equity capital invested (“return on equity”) is the basic prerequisite for all further scientific considerations. A company’s success is ultimately measured in terms of its profit, i.e. the difference between income and expenditure achieved by the company. These are the central economic variables. Our legal system, too, without exception takes an economic perspective: the aim of any law is to avoid or resolve economic conflicts between the parties involved. In the area of finance, there are comprehensive statutory capital requirements and other regulatory requirements. To sum it up with Milton Friedman: “There is one and only one social responsibility of business,” he wrote, and that was to “use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud (…)”. Thus, the one and only responsibility a company has is to increase profits. This is the prerequisite for everything else. Or in a catchword: The purpose of business is business.
2. Economic growth on its own does not lead to greater prosperity and participation
However, the above assessment in itself is blurred, as it equates or even confuses economic growth and the associated productivity gains, job creation and consumption opportunities with the prosperity of broad sections of society. Thus, the trickle-down effect, which assumes that any economic growth favoured by the free market may by itself lead to greater equality and social integration in the world, is not verifiable and has simply not occurred in economically successful societies. However, the opposite is true: a free (economic) society, which presupposes or favours the free exercise of economic activity, indeed creates economic growth with opportunities for participation. This economic growth, however, does not automatically lead to equality and integration by itself; but rather, in a liberal, free and social society, the people are able to demand or grant them. In other words: a liberal and social society, with its enterprises and entrepreneurs, with its trade unions, associations, societies, citizens’ movements, the state and its institutions, i.e. an interplay of the most diverse functionaries, creates the basis for broad participation in prosperity, equality and integration.
3. Ethics as an entrepreneurial concern
The economic activity taken for granted in a free society is therefore neither ethical nor unethical in itself. Thus, the managers of an enterprise decide whether, next to economic success, there is an additional “goal”, “meaning” or “ethos” in the enterprise’s business activity. In the Federal Republic of Germany, this is already practised on a daily basis by many (medium-sized) companies, where many employees or the social environment profit from the social benefits and connections of businesses. In view of the immense complexity and specialisation of economy and technology – in particular due to digitisation –, as well as the challenges posed by new economic and political systems in emerging countries, and in view of climate change and other ecological issues, enterprises cannot ignore these fundamental questions and their impact on society. These issues are too important to be left to state institutions or NGOs alone. They raise the fundamental questions of how we want to deal with these changes and how they change us, as well as how we want to live in the future. The protagonists, who are significantly involved in this process of change due to technical/economic development, must participate in this development. This results in the necessity of defining one’s own ethical standards against which the economic and technical development of one’s own enterprise can be measured. In this respect, the institutionalisation of ethics in companies is absolutely necessary.
Moreover, the joint shaping of the future with its social, ecological and technical challenges will certainly be more successful than trying to “improve” businesses, people and society with ever new regulations and prohibitions. Regulation is not a guideline and laws are not yet good morals. The approach of acting morally and ethically must come from the protagonists in business itself; it cannot be enforced by legislators, EBA (European Banking Association) or BaFin (German Financial Supervisory Authority) through laws, minimum requirements or directives.
III. New paths in entrepreneurial decision-making
1. The search for ethics, values and meaning
But what exactly is it that currently preoccupies many entrepreneurs, managers and employees? Various current surveys and studies, which are published in specialized magazines and in the economic press, ask quite generally about, or look for, values, meaning or socially responsible behaviour. But what is hidden behind these words? In philosophy, the explanations of these topics fill entire libraries; therefore, it is, of course, neither effective nor possible to summarise the scientific discourse here.
Based on the corresponding questions in the surveys mentioned above and on my own experience as well, it now becomes clear that those responsible in business increasingly aim for both ethical actions as well as economic ones. In addition to operational value creation (in the sense of making a profit), ideational values should also be taken into consideration. Criteria for good (or bad) action and the evaluation of motives and consequences should be established. The focus is on the question of moral and thus ethical action.
This question is always closely related to the “aim” or “purpose” of an activity: an action is meaningful if it is directed towards a concrete objective and is also capable of achieving that objective. However, as can be seen from the abovementioned studies and surveys, economic “goal” and economic “meaning” are also influenced by ethical or moral framework conditions: For many entrepreneurs and employees, it no longer seems “sensible” to achieve economic or monetary goals alone (sales goals, profit targets, becoming the No. 1, etc.). Rather, a goal and the activity directed towards it are regarded as meaningful if they correspond to a higher, thus an ideal value. In this respect, the circle closes here: The question of ethical action is directly related to the “meaning” of an activity.
2. What values? What ethics?
The desire to implement “values” and “meaning” (or in a new buzzword “purpose”) is currently supported by various methods (and by various management consultancies). This approach is certainly justifiable. Nevertheless, the question arises as to how sustainable and lasting such concepts will be. If one poses the question of “sense”, of “morality and ethos”, then permanence and a broad acceptance by the persons involved are immanent to these terms: It is impossible from the outset to formulate a “meaning” or “ethos”, and, after a short time, to exchange or discard it again. It is therefore necessary to find basic principles for the search for “meaning” and “ethos” that are durable and capable of consensus.
But which values, which meanings and which ethical framework are sustainable in the long term? Which principles may be expedient here? One conceivable solution is to revert to existing principles, cultures and values that have evolved historically and socially as well as are generally accepted ones. In the following, therefore, some basic principles will be presented which can serve as a basis for orientation helping to define a canon, or culture, of values.
a) Basic ethical principles
The great world religions as well as diverse ideologies offer basic principles that in essential parts show content-related similarities. The focus of these basic principles is always the well-being of man. Here – with absolute authority, as only the religions can do – the well-being and the dignity of the human being are emphasized as basic principles and objectives of the human ethos. Human dignity, human freedom, human rights can thus not only be stated positivistically, but can also be justified to an ultimate depth. Unified and to a great extent universally, these religions demand non-negotiable commandments, so as not to kill, not to steal, not to lie, to live morally with integrity and to respect parents/children. These commandments may at first glance seem very general and antiquated. However, transferred to our current reality of life, they formulate concrete requirements and guidelines for entrepreneurial action. A few examples:
- The commandment not to steal formulates the concrete demand to avoid (semblances of) corruption or even nepotism. It also has an influence on our sales structures by avoiding sales systems that place their own economic success above the interests of customers or other business partners.
- The same applies to the imperative of moral integrity. Correctly, this commandment is the “prohibition of fornication”. However, even this very unwieldy and anachronistic commandment provides concrete and helpful maxims for action, e.g. not to exploit one’s own position of power in relation to third parties, to see employees and customers as individuals and not merely as an operational factor, or to recognise and determine the limits in business dealings, e.g. to carefully choose sales targets without unduly claiming or exploiting employees, customers, resources and structures.
- With respect to the commandment not to lie, the current scandals about Libor and exhaust manipulation immediately spring to mind. Does the economic goal sanctify all means? Or is there not rather a fundamental value at the centre of attention: trust in honest social and business cooperation among people.
- And even the supposedly irrelevant ban on killing can provide guidelines for investment and credit policy. However, this commandment does not always require a commitment to entirely refrain from granting loans to companies with specific business purposes (such as weaponry, conventional power generation, etc.). Nevertheless, it can accompany the individual dispute in the entrepreneurial decision-making process and influence the final resolutions.
The resulting action patterns lead a “middle way” in entrepreneurial action and thus contain a demand for responsible action on behalf of oneself and the environment. What is required is not just rules for business, but an attitude or a virtue that can control people’s behaviour from within. For those readers to whom this religiously rooted approach seems dubious, Kant’s categorical imperative may serve as a rational and also secular variation of the commandments: “Act only according to that maxim by which you can at the same time will that it should become a universal law” or ” Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end “.
b) Basic social and ethical models using the example of Catholic Social Doctrine
Another viable model for “ethical”, “social” and “meaningful” entrepreneurial action can be found in the system of Catholic Social Doctrine. For Ralf Dahrendorf, the great sociologist and pioneer of social-liberal social systems, the Catholic Social Doctrine was the most important root of the Federal Republic of Germany’s successful concept of economic policy and thus the basis of the social market economy. The foundations of the Catholic Social Doctrine are manifold and originate from encyclicals as well as essays and scientific papers by theologians, sociologists, economists and politicians. The success of this concept is certainly due to broad support of the Doctrine outside the Catholic Church, and in particular also outside the Christian philosophy. As a real principle or better foundation stands the Caritas principle, i.e. an attitude of life which defines esteem, appreciation, charity and – in the Christian point of view – divine love as a leitmotif. Its solid basis is its strictly humanistic orientation, by its emphasis on individual responsibility based on the reference to God.
Principles such as the Catholic Social Doctrine will never be able to justify economic actions and decisions on their own. Particularly in macroeconomics or in questions of economic policy, analytical explanations of economic problems are required alongside normative-ethical views. But just as the Catholic Social Doctrine has had intersections with and influence on Ordo-Liberalism and ultimately on the Social Market Economy, these principles can also form a framework or a basis for concrete entrepreneurial decisions. The essential points of orientation in the Catholic Social Doctrine are a social obligation of ownership of property, social and opportunity equality, protection of women’s rights, worldwide distribution of economic goods, co-responsibility and co-determination in the company, reconciliation of interests between capital and labour, protection of the family and formation of property ownership in the hands of employees. The guiding concepts are personality (dignity of the person), solidarity (human cohesion) and subsidiarity. These orientation points and guiding concepts cover a wide field of human coexistence and certainly have a broad capacity for consensus and a supporting power, also for fundamental decisions in companies. From each of the orientation points or guiding concepts, company-specific and “ethical” or “meaningful” maxims can be derived. In this sense, entrepreneurial action would then be more than the sum of purely economic decisions.
c) Further basic principles
Of course, many other basic principles, also less religious or ideological ones, could be considered. One conceivable option would be the “revival” of basic business models, i.e. the question of why the company or bank exists and should exist in the future (cooperative principle; founding origin of savings banks, etc.).
3. Integration into entrepreneurial practice:
a) Reconciliation of ethical and economic actions
The current tendencies towards the search for, and implementation of, “meaning” and “ethos” have led to certain uncertainties in some of the classical economic circles. The classifications as a “Purpose-Circus”, as a “change of capitalists to do-gooders of the world”, of course misjudge the fact that these tendencies are primarily about clear economic issues: the economic and social framework in developed Western societies has simply changed. In addition to the objective of obtaining a product of high quality and low cost, for business owners, customers and employees, other requirements are now important, namely the questions of sustainability, ecological compatibility and social standards in manufacturing. To dismiss these as “do-gooder issues” means first of all to neglect economic framework conditions and thus economic (!) realities.
b) Implementation of an ethical framework: culture of values
Morality and ethos cannot be something marginal or artificial, but must form a “moral framework” for the company and its actions; ethos does not only mean moral appeals, but moral action. Today, responsible business practice consists of convincingly combining economic strategy and solid ethical judgment. This paradigm becomes reality when it measures economic action on whether it is socially, environmentally and future-compatible, in short: whether it is sustainable and humanistic. In business, a canon, or a culture, of values should be developed, e.g. based on the basic commandments or principles presented above. Enterprises should take great care to ensure that the created values and ethical maxims are specific and tangible and correspond to the reality of the company’s business, structure and environment.
This culture of values must then be integrated into the corporate structures. Guidelines in glossy format may be important, but they will have an impact only if they are embraced by all those working with the company. Therefore, as a first step, the culture, or canon, of values should be raised to the level of the corporate mission statement and the business and risk strategy. The contents of the business and risk strategy must therefore be reviewed and aligned with the ethical guidelines of the canon of values. Within the framework of the strategy process (e.g. using SWOT analysis and Balanced Scorecard), the strategic goals and the individual targets should also be measured against the ethical guidelines. This, of course, has consequences for the essential parameters of the company: in the area of finance, the ethical guidelines will particularly affect the investment policy. In the area of personnel, new management structures and participation opportunities will need to be reconsidered, as will training and further education of personnel, not only in terms of professional but also social skills. In the area of the financial market, questions of consumer protection, suitability of products, sales targets should come into focus. Questions will also have to be raised with regard to business processes, for example their ecological effects, or whether they support or, on the contrary, control the activities of employees or even impair free activity.
The culture of values and the models and strategies influenced by it must ultimately be put into practice. They need a foundation in the form of an inner attitude on the part of all those involved to implement these new guiding principles in the company. Here, the decisive factor is the company management or the executives, whose actions and decisions exemplify the values, communicate them and make them tangible. This requirement is easily imposed but needs further prerequisites: It must be invested in the infrastructure and the competence of the executives. Thus, a mission statement can also have an impact on personnel organization, since a corresponding understanding of leadership in flat hierarchies is certainly easier and more consistent to implement. A paradigm shift in employee selection may also be necessary: Not only the best professionals will be employed/chosen, but among them those with social competence and emotional intelligence.
The implementation of new ethical values in the mission statement and its implementation requires constant review regarding their realisation and, of course, further development. However, a company should beware of one danger, namely the actual regulation of ethical guidelines. According to the author’s understanding, ethical models or a culture of values require leadership responsibility and entrepreneurial organization and not contractual or statutory requirements.
IV. Practical consequences
In a company, ethics, values and meaning should stand for themselves and should not require economic legitimation. Irrespective of this, balancing economic strategy and ethical judgment will lead to prosperity and economic success.
In two different long-term studies, it was discovered that both the share value development and the turnover of ethically-oriented companies clearly exceeded those of companies without corresponding principles (share value 1.681 % and turnover 400 %). Even with respect to a particular area that has been controversially discussed in recent decades, companies with a social-ethical focus perform better, namely those companies that have increased the proportion of women at the executive level: according to a study by the Peterson Institute for International Economics, including almost 22,000 companies from 91 countries, a 30 % increase in the proportion of women in the top management was accompanied by a 15 % increase in net sales.
In times of demographic change and the resulting need to find the best-qualified employees, the figures mentioned at the beginning of this report make people sit up and take notice: nine out of ten employees state that they prefer meaningful work over a higher salary. Other studies are showing similar results. In a survey by Boston Consulting, 28 % of the top talents were classified as “seekers of meaning” because they do not consider material values to be primarily important at work. The fight for the best talents of the future is no longer decided with the pay check (alone), but with the offer of a meaningful, value-oriented job. The employees in such a team will also be more motivated and less employees than comrades-in-arms for joint challenges.
The figures on the behaviour of customers and consumers are also attracting attention: 80 % of German consumers believe that social and economic interests should have equal weight in business decisions. When choosing between two brands of the same quality and price, “social purpose” is the decisive purchasing criterion for German consumers (45 %), clearly ahead of design and innovation (34 %) and brand loyalty (21 %). 47 % of German consumers would switch to a comparable brand that is socially committed, and 50 % would recommend products or services that do good.
Finally, ethical corporate management has a crisis-preventive effect by minimizing operational (legal) risks and reducing costs in all areas of compliance.
Now is the time to put ethics, values and meaning onto the corporate agenda.
Suggestions for Business Practice
- The desire of many managers and employees for meaningful action should be taken serious as a fundamental social trend.
- Morality and ethos in a company should not be something artificially imposed or part of a marketing concept but should form a “moral framework” of entrepreneurial action on all levels.
- Permanent and consensual value systems have a positive influence on entrepreneurial activity, especially regarding winning customers and employees as well as reducing risks.
- Apostolic Letter Evangelii Gaudium, 24.11.2013, No. 53. ↑
- compare Deutscher Startup Monitor 2018, S. 27. ↑
- compare www.betterup.co, last visited 15/08/2019. ↑
- FAZ, Eine bemerkenswerte Mahnung, (A remarkable reminder), dated 17.01.2018, with reference to a report in the New York Times: BlackRock’s Message: Contribute to Society, or Risk Losing Our Support, vom 15.01.2018. ↑
- Cf. https://die-deutsche-wirtschaft.de/bedingsloses-grundeinkommen-precht-grillo-hajali-diskutieren/, last visited 15/08/2019. ↑
- Cf. Albach, Working Paper: Gutenberg und die Zukunft der Betriebswirtschaftslehre; WZB Discussion Paper, No. FS IV 97-16. ↑
- Friedman: Kapitalismus und Freiheit/Capitalism and Freedom, 11. Aufl. 2016, p. 164 (quoted after German translation). ↑
- Cf. Think:Act Magazine Purpose 25.06.2018 – Why companies need to strive for more than just profit. ↑
- Cf. Paul Krugman: „Die USA sind kein Vorbild“ (The USA are no role models), Interview Managermagazin 26.05.2018. ↑
- Cf. Küng, Projekt Weltethos (1990), S. 81-86 ↑
- Küng, a.a.O. ↑
- Kant, Kritik der praktischen Vernunft (Critique of Practical Reason); cited from: Gesammelte Schriften, AA IV, 421. ↑
- Cf. Emunds, Ungewollte Vaterschaft („Unwanted paternity“) in: Ethik und Gesellschaft 1/2010, S. 1–26, www.ethik-und-gesellschaft.de; Katholische Soziallehre und Soziale Marktwirtschaft, Wissenschaftlicher Dienst des Deutschen Bundestages WD1-3000-073/13, with an overview of critical voices. ↑
- Oswald von Nell-Breuning, Cf. Marx, Wirtschaftsliberalismus und Katholische Soziallehre, Freiburg, Walter Eucken Institut (2006). ↑
- Cf. Merk, Purpose, FAS vom 10.03.2019, S. 17. ↑
- Küng, Handbuch Weltethos (2012), S. 109–116. ↑
- Cf., Projekt Weltethos (1990), S. 109–116. ↑
- Cf. Thomsen, Die Wirtschaft muss sich neu ausrichten, um nachhaltig erfolgreich zu sein, (The economy must realign itself in order to be successful in the long term) Handelsblatt vom 22.03.2019. ↑
- Cf. Bös, FAZ 11/02/2016. ↑
- https://www.bcg.com/de-de/d/press/PM_Millennials_Germany_25102018-205778, last visited 15/08/2019. ↑
- Cf. among many others the study of Morton Hansen, cited under https://karriereboost.de/karrierecoach/der-sinn-der-arbeit-purpose-steigert-performance/, last visited 15/08/2019. ↑
- Cf. Edelman goodpurposeTM Studie, https://pr-journal.de/lese-tipps/themen-der-zeit/9770-konsumenten-verlangen-heute-mehr-von-unternehmen-purpose-als-fuenftes-pa-im-marketing-mix.html, last visited 15/08/2019. ↑