Ethics and the role of corporations

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Ethics and the role of corporations

This article from Wharton asks why smart people do unethical things. Here is a partial answer, that I don't totally agree with.

R. Edward Freeman, director of the Olsson Center for Applied Ethics at the University of Virginia's Darden Graduate School of Business Administration, says there is nothing new about business scandals. But he does think the idea that management's only goal is to maximize shareholder value — doing just about whatever it takes to boost a company's stock price — has been taken to extremes.

"There's nothing new about [today's scandals] and nothing's been fixed," he says. "Our idea of what good management is has been hijacked. We pay attention to shareholder value and managing value. If you give a small boy a hammer, the world looks like a nail."

Truly good management, Freeman says, is "paying attention to customers, having suppliers who want to work with you and want to make you better … It's being a good citizen in your community. If you do all that you're going to make money. We have focused on the making-money part and not the other parts. Some people say it's shareholders versus stakeholder, but I say no. Enron didn't go bust because the CEO stole $43 million. Enron went bust because somewhere its leadership forgot about customers. My take is we've got to go back to the basics."

I would say instead that managers have a poor view of what maximizing shareholder value means. If you get embroiled in scandal to boost stock prices, then it hits the news and the stock drops, you didn't really boost shareholder value. Companies are supposed to maximize economic performance. That is their ethical duty. But total economic performance often includes more than just stock price and net income. It includes externalities that may not be fully monetized in a company's transactions. When externalities can be factored in, that makes capitalism better. That is why I dislike regulation, but will support it if it means more information will be exposed so that we capitalists can make more accurate decisions.

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