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The discussions of the "social responsibilities of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people have responsibilities.

A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.

Indeed, proponents of all the normative ethical theories would insist that the only rational choice is to have a single ethical standard.

A deontologist would argue that you should adhere to particular duties in performing your actions, regardless of the parties with whom you interact. A utilitarian would say that any act you take should result in the greatest good for the greatest number. A virtue ethicist would state that you cannot be virtuous if you lack integrity in your behavior toward all.

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective.

A group of persons might establish a corporation for an eleemosynary purpose--for example, a hospital or a school. The manager of such a corporation will not have money profit as his objectives but the rendering of certain services.

Honor in ancient Greece was not just an individual characteristic but also a function of the group to which an individual belonged, and the person derived self-esteem from membership in that group. Civic virtue consisted of honorable living in community. Business scandals today often arise not from conflicts of interest but from conflicts of honor in which employees feel torn by their allegiance to a coworker, a supervisor, or the organization.

Although few people would use the term honor to describe contemporary workplace culture or corporate mission, nearly everyone understands the importance of reputation and its impact, positive or negative, on a business. Reputation is no accident. It is the product of a culture formed by individual and group effort. That effort is directed, intentional, and ongoing.

Some people who adopt multiple ethical standards may choose to exhibit the highest standards with their families, because these are the people they most revere. In a business setting, however, this same person may choose to be an unethical actor whose sole goal is the ruthless accumulation of wealth by any means.

Because work and family are not the only two settings in which we live our lives, such a person may behave according to yet another standard to competitors in a sporting event, to strangers on the street, or to those in his or her religious community.

The buying or selling of stocks, bonds, or other investments based on nonpublic information that is likely to affect the price of the security being traded is called insider trading. For example, someone who is privy to information that a company is about to be taken over, which will cause its stock price to rise when the information becomes public, may buy the stock before it goes up in order to sell it later for an enhanced profit. Likewise, someone with inside information about a coming drop in share price may sell all his or her holdings at the current price before the information is announced, avoiding the loss other shareholders will suffer when the price falls.

Although insider trading can be difficult to prove, it is essentially cheating. It is illegal, unethical, and unfair, and it often injures other investors, as well as undermining public confidence in the stock market.

Aristotle identified two types of virtues, which the philosophical community of his day agreed were objective and not subjective. The two types were intellectual and moral. Intellectual virtues—including knowledge (epistḗmē), wisdom (sophíā), and, most importantly for Aristotle, prudence (phrónēsis), or practical wisdom—served as guides to behavior; that is, a person acted prudently based on the wisdom gained over time through the ongoing acquisition and testing of knowledge. To give an oversimplified but practical application of Aristotelian thinking, a hiring manager acts prudently when assessing a pool of candidates based on knowledge of their backgrounds and on insight gained after years of working in that role. The manager may even use intuitive reason regarding a candidate, which Aristotle believed was another way of arriving at truth. Understood in this way, the manager's intuition is an impression regarding character and someone's potential fit in an organization.

Among the intellectual virtues, prudence played the major role because it helped individuals avoid excess and deficiency and arrive at the golden mean between the two. Prudence has been translated as "common sense" and "practical wisdom" and helps individuals make the right decision in the right way at the right time for the right reason. In Aristotle's view, only the truly prudent person could possess all the moral virtues.

There is a definite contrast between utilitarianism, even Mill's version, and Kant's system of ethics, known as deontology, in which duty, obligation, and good will are of the highest importance. (The word is derived from the Greek deon, meaning duty, and logos again, here meaning organization for the purpose of study.)

An ethical decision requires us to observe only the rights and duties we owe to others, and, in the context of business, act on the basis of a primary motive to do what is right by all stakeholders. Kant was not concerned with utility or outcome—his was not a system directed toward results. The question for him was not how to attain happiness but how to become worthy of it.

Stakeholders need to respond to these options. Consumers need to purchase responsible products and services. Employees need to choose to work for responsible employers. Suppliers need to provide for responsible buyers. Investors need to finance responsible opportunities.

And communities need to welcome responsible entrants and help to sustain responsible incumbents. Responsible capitalism depends on responsible behavior from both business and its stakeholders.

In reality, the only way to make profits is to have great products and services that customers want because those offerings make their lives better. Profits follow from having suppliers who are committed to making a company better, and employees who are inspired to work together to create something of value.

And if a business is not a good citizen in its community, at least in a free society, people will use the political process to regulate the business closely and even prevent it from operating within community borders. Stakeholders are interdependent, and everyone who runs a great business knows that.

Utilitarianism could motivate individuals within the organization to take initiative, become more responsible, and act in ways that enhance the organization's reputation rather than tarnish it. Mill's On Liberty (Figure 2.8), a short treatment of political freedoms in tension with the power of the state, underscored the importance of expression and free speech, which Mill saw not as one right among many but as the foundational right, reflective of human nature, from which all others rights derive their meaning.

And therein lay the greatest utility for society and business. For Mill, the path to utility led through truth, and the main way of arriving at truth was through a deliberative process that encouraged individual expression and the clash of ideas.

We have followed the Wells Fargo scandal with both great interest and dismay because we have studied the cultural causes of unethical behavior in organizations for years—long enough to say that scandals like these, especially the accounts scandal, are predictable. Which raises the question: Why didn't managers prevent it? One possibility is that they didn't care, despite how damaging scandals like these can be, not just to their reputation, but to their business.

Another possibility is that business school professors, like us, are failing to adequately educate managers on how to create strong ethical cultures where such a scandal is much less likely to occur. Perhaps it's a little of both. In any case, we can't do much about the former, but we can tackle the latter. It is helpful to consider what set of circumstances causes these scandals to happen.

Philosophy, in particular, flourished during the Golden Age, with various schools of thought attempting to make sense of the natural and human worlds. The human world was thought to be grounded in the natural world but to transcend it in striking ways, the most obvious being humans use of reason and deliberation. Philosophers like Socrates, Plato, and Aristotle tackled fundamental questions of human existence with such insight that their ideas have remained relevant and universal even at the dawn of artificial intelligence.

As British mathematician and philosopher Alfred North Whitehead (1861-1947) observed, "the safest general characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato."

In that study, we found that even when lower-level employees pushed back against unrealistically high goals (as many did), their immediate (middle) managers persisted in applying pressure, because these managers are often—and were— compensated based on the goals their subordinates achieved. Even if they don't receive monetary incentives, it benefits managers' reputations and careers if their subordinates are perceived to be "successful."

As a result, middle managers often feel compelled to find ways for their employees to either achieve the goal (for instance, by opening accounts for customers without their knowledge) or to make it look as if they are achieving it (for instance, by representing others' sales as their own).

It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundation of a free society. That would be to call on them to exercise a "social responsibility"! If our institutions, and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them.

At the same time, I can express admiration for those individual proprietors or owners of closely held corporations or stockholders of more broadly held corporations who disdain such tactics as approaching fraud.

Utilitarianism is used frequently when business leaders make critical decisions about things like expansion, store closings, hiring, and layoffs. They do not necessarily refer to a "utilitarian calculus," but whenever they take stock of what is to be gained and what might be lost in any significant decision (e.g., in a cost-benefit analysis), they make a utilitarian determination.

At the same time, one might argue that a simple cost-benefits analysis is not a utilitarian calculus unless it includes consideration of all stakeholders and a full accounting of externalities, worker preferences, potentially coercive actions related to customers, or community and environmental effects.

Successful corporate leaders and the companies they represent will take pride in their enterprise if they engage in business with honesty and fair play. To treat customers, clients, employees, and all those affected by a firm with dignity and respect is ethical. In addition, laudable business practices serve the long-term interests of corporations. Why?

Because customers, clients, employees, and society at large will much more willingly patronize a business and work hard on its behalf if that business is perceived as caring about the community it serves. And what type of firm has long-term customers and employees? One whose track record gives evidence of honest business practice.

For this reason, we use the words ethics and morals interchangeably in this book, though some philosophers distinguish between them. We hold that "an ethical person" conveys the same sense as "a moral person," and we do not regard religious belief as a requirement for acting ethically in business and the professions.

Because we are all humans and in the same world, we should extend the same behavior to all. It is the right way to behave, but it also burnishes our own professional reputation as business leaders of integrity.

Given this historical context, it is understandable that Bentham used reason and science to explain human behavior. His ethical system was an attempt to quantify happiness and the good so they would meet the conditions of the scientific method. Ethics had to be empirical, quantifiable, verifiable, and reproducible across time and space. Just as science was beginning to understand the workings of cause and effect in the body, so ethics would explain the causal relationships of the mind.

Bentham rejected religious authority and wrote a rebuttal to the Declaration of Independence in which he railed against natural rights as "rhetorical nonsense, nonsense upon stilts." Instead, the fundamental unit of human action for him was utility—solid, certain, and factual.

Capitalism is simply the greatest system of social cooperation that we have yet invented. It allows free people to cooperate together and create value for each other in a way that no individual can do alone.

Business can be a part of solutions to societal problems, rather than a cause — witness Tesla and renewable energy, IBM and smart cities, and recent startups like Milk Stork Inc., based in Palo Alto, California, which provides an option for mothers who travel for business to get breast milk home to their children.

This can be done — business is certainly capable of motivating the interests of consumers, employees, investors, and other stakeholders toward one option over another.

Business drives demand for technological innovation: You probably didn't know that your smartphone would be able to do as much as it does, but now that you do, would you ever go back to a flip phone? In the same way, business can drive demand for responsible capitalism by offering responsible options for all stakeholders.

The stakeholder approach sets forth a new conceptualization of business, in which business is understood as a set of relationships and management's job is to help shape these relationships.

Business is about how customers, suppliers, employees, financiers, communities, and managers interact to create value, and there is no single formula for balancing or prioritizing stakeholders. Creating that balance is part of what management is all about, and it will be different for different companies at different times.

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct "social responsibility," rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it.

But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.

Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he recognizes or assumes voluntarily--to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country's armed forces. If we wish, we may refer to some of these responsibilities as "social responsibilities."

But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibilities," they are the social responsibilities of individuals, not business.

Front-line employees knew that selling eight products per customer wasn't feasible. The bank itself even acknowledged that many of the branches would not be likely to meet the goal.

But senior leadership maintained it, and middle managers went along, scrutinizing employees' performance with a passion, and those who failed to achieve the goals faced ridicule and termination. Employees were under great pressure to comply.

In recent years, many organizations have embraced corporate social responsibility (CSR), a philosophy (introduced in Why Ethics Matter,) in which the company's expected actions include not only producing a reliable product, charging a fair price with fair profit margins, and paying a fair wage to employees, but also caring for the environment and acting on other social concerns. Many corporations work on prosocial endeavors and share that information with their customers and the communities where they do business.

CSR, when conducted in good faith, is beneficial to corporations and their stakeholders. This is especially true for stakeholders that have typically been given low priority and little voice, such as the natural environment and community members who live near corporate sites and manufacturing facilities.

Let us take a close look at this statement. "Engaging stakeholders in long-term dialogue" appears to describe an ongoing and reciprocal relationship that helps improvement be continuous.

Commitment to "stakeholder engagement as a core component of business and sustainability strategies" appears to focus the company on the requirement to conduct clear, honest, transparent reporting.

Behaving ethically requires that we meet the mandatory standards of the law, but that is not enough. For example, an action may be legal that we personally consider unacceptable.

Companies today need to be focused not only on complying with the letter of the law but also on going above and beyond that basic mandatory requirement to consider their stakeholders and do what is right.

Although the ethical standard we adopt is always a choice, certain life experiences can have more profound effects on our choice than others. Among the most formative experiences are family upbringing and cultural traditions, broadly defined here to include religious and ethnic norms, the standard patterns of behavior within the context in which we live.

Culture and family also influence each other because the family exists in and responds to its cultural context, as well as providing us with the bedrock for our deepest values. Regardless of this initial coding, however, we can choose the ethical standards we apply in the business context.

As instances of this type of pressure on corporations increase around the world, stakeholder groups become simultaneously less isolated and more powerful. Firms need customers.

Customers need employment, and the state needs taxes just as firms need resources. All stakeholders exist in an interdependent network of relationships, and what is most needed is a sustainable system that enables all types of key stakeholders to establish and apply influence.

Unlike Bentham and Mill, Immanuel Kant (1724-1804) was not concerned with consequences of one's actions or the harm caused to one's individual interests. Instead, he focused on motives and the willingness of individuals to act for the good of others, even though that action might result in personal loss.

Doing something for the right reason was much more important to Kant than any particular outcome.

It would be hard to overstate the influence of ancient Athens on Western civilization. Athenian achievements in the arts, literature, and government have molded Western consciousness. Perennial themes, such as the search for individual identity and each person's place in the world, appear in countless novels and Hollywood screenplays. The role of Athenian ethical theories in philosophy has been profound, and Athenian principles continue to be influential in contemporary philosophy. Ethics, as a form of applied philosophy, was a major focus among the leaders of ancient Athens, particularly teachers like Socrates, Plato, and Aristotle. They taught that ethics was not merely what someone did but who someone was.

Ethics was a function of being and, as the guiding principle for dealings with others, it naturally applied as well to the sensitive areas of money and commerce.

The positive feeling stakeholders have for any particular company is called goodwill, which is an important component of almost any business entity, even though it is not directly attributable to the company's assets and liabilities. Among other intangible assets, goodwill might include the worth of a business's reputation, the value of its brand name, the intellectual capital and attitude of its workforce, and the loyalty of its established customer base.

Even being socially responsible generates goodwill. The ethical behavior of managers will have a positive influence on the value of each of those components. Goodwill cannot be earned or created in a short time, but it can be the key to success and profitability.

Insider trading laws are somewhat complex. They have developed through federal court interpretations of Section 10(b)5 of the Securities Exchange Act of 1934, as well as through actions by the U.S. Securities and Exchange Commission (SEC). The laws identify several kinds of violations. These include trading by an insider (generally someone who performs work for the company) who possesses significant confidential information relevant to the valuation of the company's stock, and trading by someone outside of the company who is given this sort of information by an insider or who obtains it inappropriately.

Even being the messenger (the one communicating material nonpublic information to others on behalf of someone else) can be a legal violation.

On the grounds of consequences, can the corporate executive in fact discharge his alleged "social responsibilities"? On the one hand, suppose he could get away with spending the stockholders' or customers' or employees' money. How is he to know how to spend it? He is told that he must contribute to fighting inflation. How is he to know what action of his will contribute to that end? He is presumably an expert in running his company--in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his holding down the price of his product reduce inflationary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages?

Even if he could answer these questions, how much cost is he justified in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropriate share of others?

In the end, Kant's systematic analysis of knowing and understanding provided a much-needed counterweight to the logic of Enlightenment rationalism. The existence of the mental structures he proposed has even been confirmed today. For instance, the scientific consensus is that humans are born with cognitive structures designed specifically for language acquisition and development.

Even more surprising, there may be similar cognitive structures for morality, conscience, and moral decision-making. So, it is quite possible that conscience, if not happiness, may have a genetic component after all, although Kant himself did not believe the categories of the understanding or the a priori structures of the mind were biological.

Justice theory may also provide a seamless way of engaging in corporate social responsibility outwardly and employee development inwardly. Fairness as a corporate doctrine can be applied to all stakeholders and define a culture of trust and openness, with all the corresponding benefits, in marketing, advertising, board development, client relations, and so on. It is also an effective way of integrating business ethics into the organization so ethics is no longer seen as the responsibility solely of the compliance department or legal team. Site leaders and middle managers understand fairness; employees probably even more so, because they are more directly affected by the lack of it.

Fairness, then, is as much part of the job as it is an ongoing process of an ethics system. It no doubt makes for a happier and more productive workforce. An organization dedicated to it can also play a greater role in civic life and the political process, which, in turn, helps everyone.

For Aristotle, everything that exists has a purpose, or end, and has been designed to meet that end. For instance, the proper end of birds is to fly, that of fish to swim. Birds and fish have been designed with the appropriate means (feathers, fins) to achieve those ends. Teleology, from the Greek telos meaning goal or aim, is the study of ends and the means directed toward those ends. What is the telos of human beings? Aristotle believed it to be eudaimonia, or happiness. By this, he did not mean happiness in a superficial sense, such as having fun or being content. Rather, he equated happiness with human flourishing, which he believed could be attained through the exercise of the function that distinguishes humans from the natural world: reason.

For Aristotle, reason was supreme and best used to increase not wealth but character. "But what is happiness?" he asked. "If we consider what the function of man is, we find that happiness is a virtuous activity of the soul."

In addition to taking this more nuanced view of profits, managers must also use a different time frame for obtaining them. Wall Street's focus on periodic (i.e., quarterly and annual) earnings has led many managers to adopt a short-term perspective, which fails to take into account effects that require a longer time to develop.

For example, charitable donations in the form of corporate assets or employees' volunteered time may not show a return on investment until a sustained effort has been maintained for years. A long-term perspective is a more balanced view of profit maximization that recognizes that the impacts of a business decision may not manifest for a longer time.

Currently 20 percent of the people on Earth consume a Coca-Cola product each day, meaning a very large portion of the global population belongs to the company's consumer stakeholder group. Depending on the process and location, it is estimated that it takes more than three liters of water to produce a liter of Coke. Each day, therefore, millions of liters of water are removed from the Earth to make Coke products, so the company's water footprint can endanger the water supplies of both employee and neighbor stakeholders.

For example, in Chiapas, Mexico, the Coca-Cola bottling plant consumes more than one billion liters of water daily, but only about half the population has running water. Mexico leads the world in per capita consumption of Coke products.

If you truly appreciate the positions of your various stakeholders, you will be well on your way to understanding the concept of corporate social responsibility (CSR). CSR is the practice by which a business views itself within a broader context, as a member of society with certain implicit social obligations and environmental responsibilities. As previously stated, there is a distinct difference between legal compliance and ethical responsibility, and the law does not fully address all ethical dilemmas that businesses face. CSR ensures that a company is engaging in sound ethical practices and policies in accordance with the company's culture and mission, above and beyond any mandatory legal standards. A business that practices CSR cannot have maximizing shareholder wealth as its sole purpose, because this goal would necessarily infringe on the rights of other stakeholders in the broader society.

For instance, a mining company that disregards its corporate social responsibility may infringe on the right of its local community to clean air and water if it pursues only profit. In contrast, CSR places all stakeholders within a proper contextual framework.

Why should we choose a single ethical code for all the contexts in which we live? The Greek philosophers and later proponents of the normative ethical theories we discussed earlier would say that if you apply your reason to determine how to behave, it makes rational sense to abide by a single ethical code for all interactions with all persons in all contexts. By doing so, you maximize your ethical behavior no matter who the other party is.

Furthermore, you have an internally consistent behavior for all family, friends, customers, clients, and anyone else with whom you interact. Thus, we need not choose different values in different contexts, and when people see us in different situations, they are more likely to trust us because they see we uphold the same values regardless of the context.

Although the ultimate aim of Aristotelian virtue ethics was eudaimonia, later philosophers began to question this notion of happiness. If happiness consists of leading the good life, what is good? More importantly, who decides what is good? Jeremy Bentham (1748-1842), a progressive British philosopher and jurist of the Enlightenment period, advocated for the rights of women, freedom of expression, the abolition of slavery and of the death penalty, and the decriminalization of homosexuality. He believed that the concept of good could be reduced to one simple instinct: the search for pleasure and the avoidance of pain. All human behavior could be explained by reference to this basic instinct, which Bentham saw as the key to unlocking the workings of the human mind.

He created an ethical system based on it, called utilitarianism. Bentham's protégé, John Stuart Mill (1806-1873), refined Bentham's system by expanding it to include human rights. In so doing, Mill reworked Bentham's utilitarianism in some significant ways. In this section we look at both systems.

Here the businessman--self-selected or appointed directly or indirectly by stockholders--is to be simultaneously legislator, executive and jurist.

He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds--all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.

The distinction Aristotle made is that the intellectual virtues are acquired purely through learning, whereas the moral virtues are acquired through practice and the development of habits. In contrast to the intellectual virtues, which focused on external acts, the moral virtues had to do with character. They included courage, self-control, liberality, magnificence, honor, patience, and amiability. Some of these virtues had different meanings in ancient Greece than they do today. "Liberal," for instance, referred not to a political or economic stance but rather to an aspect of personality. Someone would be considered liberal who was open and sharing of him- or herself and his or her talents without fear of rejection or expectation of reciprocity. The paragon of these virtues was the magnanimous individual, someone for whom fame and wealth held little attraction. This person had self-knowledge; was not rash, quick to anger, or submissive to others; and acted with self-respect, control, and prudence. The magnanimous individual achieved happiness by leading a life characterized by reason and will.

He or she remained in control of self and did not hand over his or her authority—or moral agency—to others, whether in judgment or in decision-making. "So, magnanimity seems to be a sort of crown of the virtues, because it enhances them and is never found apart from them. This makes it hard to be truly magnanimous, because it is impossible without all-round excellence," according to Aristotle.

And, whether he wants to or not, can he get away with spending his stockholders', customers' or employees money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have reduced the corporation's profits and the price of its stock.)

His customers and his employees can desert him for other producers and employers less scrupulous in exercising their social responsibilities.

However, because humans are endowed not only with reason but also with the capacity to act in an honorable and ethical manner, they may reject their end, either intentionally or by default. The great task of life, then, is to recognize and pursue happiness, no matter the constraints placed on the individual, the most dramatic of which are suffering and death. Birds and fish have little difficulty achieving their ends, and we can assume that much of this is due to their genetic coding. Because happiness might not be genetically encoded in human beings, they must learn how to be happy.

How do they do that? According to Aristotle, eudaimonia is achieved by leading a virtuous life, which is attained over time. "Happiness is a kind of activity; and an activity clearly is developed and is not a piece of property already in one's possession."

Part of Rawls's critique of utilitarianism is that its utility calculus can lead to tyranny. If we define pleasure as that which is popular, the minority can suffer in terrible ways and the majority become mere numbers. This became clear in Mills's attempt to humanize Bentham's calculus. But Mills's harm principle had just as bad an effect, for the opposite reason. It did not require anyone to give up anything if it had to be done through coercion or force. To extend Rawls's cake example, if one person owned a bakery and another were starving, like Jean Valjean's sister in Les Misérables, utilitarianism would force the baker to give up what he had to satisfy the starving person without taking into account whether the baker had greater debts, a sick spouse requiring medical treatment, or a child with educational loans; in other words, the context of the situation matters, as opposed to just the consequences.

However, Mill's utilitarianism, adhering to the harm principle, would leave the starving person to his or her own devices. At least he or she would have one slice of cake. This was the problem of distribution and redistribution that Rawls hoped to solve, not by calculating pleasure and pain, profit and loss, but by applying fairness as a normative value that would benefit individuals and society.

Nobel Prize-winning economist Milton Friedman stated in a now-famous New York Times Magazine article in 1970 that the only "social responsibility of a business is to increase its profits." This concept took hold in business and even in business school education.

However, although it is certainly permissible and even desirable for a company to pursue profitability as a goal, managers must also have an understanding of the context within which their business operates and of how the wealth they create can add positive value to the world. The context within which they act is society, which permits and facilitates a firm's existence.

Managers do sometimes focus predominantly on stockholders, especially those holding the largest number of shares, because these powerful individuals and groups can influence whether managers keep their jobs or are dismissed (e.g., when they are held accountable for the company's missing projected profit goals). And many believe the sole purpose of a business is, in fact, to maximize stockholders' short-term profits.

However, considering only stockholders and short-term impacts on them is one of the most common errors business managers make. It is often in the long-term interests of a business not to accommodate stockowners alone but rather to take into account a broad array of stakeholders and the long-term and short-term consequences for a course of action.

Year after year, the nation's most admired companies are also among those that had the highest profit margins. Going green, funding charities, and taking a personal interest in employee happiness levels adds to the bottom line! Consumers want to use companies that care for others and our environment. During the years 2008 and 2009, many unethical companies went bankrupt.

However, those companies that avoided the "quick buck," risky and unethical investments, and other unethical business practices often flourished. If nothing else, consumer feedback on social media sites such as Yelp and Facebook can damage an unethical company's prospects.

The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his "social responsibility," he is spending his own money, not someone else's.

If he wishes to spend his money on such purposes, that is his right and I cannot see that there is any objection to his doing so. In the process, he, too, may impose costs on employees and customers. However, because he is far less likely than a large corporation or union to have monopolistic power, any such side effects will tend to be minor.

In this case (as in many scandals), aggressive sales goals played a major role in motivating misbehavior, but abandoning goal-focused performance metrics is often not an option: Goal-setting motivates performance, and in the absence of goals, performance often deteriorates rapidly, as Wells Fargo learned when it briefly experimented with abandoning sales goals post-scandal. But if the targets are unachievable, research shows, goal-setting can increase the potential for employees to behave unethically.

If leaders plan to use goal-based metrics, they should insure that the goals are achievable and also calibrated with ethical behavior in mind: The ethical "how" must matter as much as the bottom line "how much" when it comes to performance evaluation and compensation for both employees and their managers.

The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for "social" purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants--insofar as their actions in the name of social responsibility are real and not just window-dressing--should be selected as they are now.

If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster "social" objectives, then political machinery must be set up to make the assessment of taxes and to determine through a political process the objectives to be served. This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.

Business is designed to meet demand. The danger of both the old story (shareholder profit maximization) and the new story (stakeholder value maximization) is that there are some activities in which business should not engage.

If, for instance, consumers value only the cheapest product or service, and it is enabled only by depriving employees of any value (and perhaps much worse), then businesspeople must engage their ingenuity and imagination. They need to be inspired to create competitive products and services that create value across the board — for employees as well as consumers, and other stakeholders as well.

I have, for simplicity, concentrated on the special case of the corporate executive, except only for the brief digression on trade unions. But precisely the same argument applies to the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility (the recent G.M. crusade, for example).

In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to "social" causes favored by activists. Insofar as they succeed, they are again imposing taxes and spending the proceeds.

Presumably, the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives.

Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly neglect the individual proprietors and speak of corporate executives.

The TBL concept recognizes that external stakeholders consider it a corporation's responsibility to go beyond making money. If increasing wealth damages the environment or makes people sick, society demands that the corporation revise its methods or leave the community. Society, businesses, and governments have realized that all stakeholders have to work for the common good. When they are successful at acting in a socially responsible way, corporations will and should claim credit.

In acting according to the TBL model and promoting such acts, many corporations have reinvested their efforts and their profits in ways that can ultimately lead to the development of a sustainable economic system.

Corporations have responded to stakeholder concerns about the environment and sustainability. In 1999, Dow Jones began publishing an annual list of companies for which sustainability was important. Sustainability is the practice of preserving resources and operating in a way that is ecologically responsible in the long term. The Dow Jones Sustainability Indices "serve as benchmarks for investors who integrate sustainability considerations into their portfolios." There is a growing awareness that human actions can, and do, harm the environment. Destruction of the environment can ultimately lead to reduction of resources, declining business opportunities, and lowered quality of life. Enlightened business stakeholders realize that profit is only one positive effect of business operations.

In addition to safeguarding the environment, other ethical contributions that stakeholders could lobby corporate management to make include establishing schools and health clinics in impoverished neighborhoods and endowing worthwhile philanthropies in the communities where companies have a presence.

During Bentham's lifetime, revolutions occurred in the American colonies and in France, producing the Bill of Rights and the Déclaration des Droits de l'Homme (Declaration of the Rights of Man), both of which were based on liberty, equality, and self-determination. Karl Marx and Friedrich Engels published The Communist Manifesto in 1848. Revolutionary movements broke out that year in France, Italy, Austria, Poland, and elsewhere.

In addition, the Industrial Revolution transformed Great Britain and eventually the rest of Europe from an agrarian (farm-based) society into an industrial one, in which steam and coal increased manufacturing production dramatically, changing the nature of work, property ownership, and family. This period also included advances in chemistry, astronomy, navigation, human anatomy, and immunology, among other sciences.

How, then, should we behave? Philosophy and science help us answer this question. From philosophy, three different perspectives help us assess whether our decisions are ethical on the basis of reason. These perspectives are called normative ethical theories and focus on how people ought to behave; we discuss them in this chapter and in later chapters.

In contrast, descriptive ethical theories are based on scientific evidence, primarily in the field of psychology, and describe how people tend to behave within a particular context; however, they are not the subject of this book.

Rawls developed a theory of justice based on the Enlightenment ideas of thinkers like John Locke (1632-1704) and Jean-Jacques Rousseau (1712-1778), who advocated social contract theory. Social contract theory held that the natural state of human beings was freedom, but that human beings will rationally submit to some restrictions on their freedom to secure their mutual safety and benefit, not subjugation to a monarch, no matter how benign or well intentioned. This idea parallels that of Thomas Hobbes (1588-1679), who interpreted human nature to be selfish and brutish to the degree that, absent the strong hand of a ruler, chaos would result. So people willingly consent to transfer their autonomy to the control of a sovereign so their very lives and property will be secured. Rousseau rejected that view, as did Rawls, who expanded social contract theory to include justice as fairness. In A Theory of Justice (1971), Rawls introduced a universal system of fairness and a set of procedures for achieving it. He advocated a practical, empirically verifiable system of governance that would be political, social, and economic in its effects.

In his justice theory, offered as an alternative to the dominant utilitarianism of the times, the idea of fairness applied beyond the individual to include the community as well as analysis of social injustice with remedies to correct it.

The common belief in ancient Greece that business and money were somehow tainted reflected Plato's concept that the physical world was an imperfect expression, or shadow, of the ideal. Everything in the physical world was somehow less than the ideal, and this included the products of human thought and labor. For example, a cow exists in the physical world as an imperfect and temporary expression of the ideal essence of a cow, what we might call "cowness." (This imperfection accounted for the many variations found in the earthly creature.) Business, as a human invention based on self-interest, also had no appreciable ideal or end. After all, what was the purpose of making money if not having more money? Any end beyond that was not evident.

In other words, money existed simply to replicate itself and was fueled by avarice (the love of money) or greed (the love of material goods). "As for the life of the businessman, it does not give him much freedom of action. Besides, wealth is obviously not the good that we are seeking, because it serves only as a means; i.e., for getting something else," said Aristotle.

Ethics consists of the standards of behavior to which we hold ourselves in our personal and professional lives. It establishes the levels of honesty, empathy, and trustworthiness and other virtues by which we hope to identify our personal behavior and our public reputation. In our personal lives, our ethics sets norms for the ways in which we interact with family and friends.

In our professional lives, ethics guides our interactions with customers, clients, colleagues, employees, and shareholders affected by our business practices (Figure 1.1). Should we care about ethics in our lives? In our practices in business and the professions? That is the central question we will examine in this chapter and throughout the book. Our goal is to understand why the answer is yes.

In 1781, at the age of fifty-six years, Kant published Critique of Pure Reason (Kritik der Reinen Vernunft) in Königsberg, Prussia (Figure 2.9). Almost immediately, it transformed him from an obscure professor of metaphysics and logic into a preeminent figure in the world of philosophy.

In the 800-page tome, Kant criticized the way rationalism ("pure reason") had assumed the mantle of absolute truth, supplanting both religious faith and empirical science. Kant referred to the unquestioned acceptance of rationalism as dogmatism. Whether Christian or revolutionary, dogmatic thinking was to be avoided because it obscured the truths of science and religion through flawed logic.

The new story of business is about creating as much value for all these stakeholders as possible, and this of course includes creating profits for shareholders.

In the global economy, customers, suppliers, employees, communities, and financiers — shareholders plus bondholders plus banks and other sources of capital — are all intertwined. The winning business models of the 21st century figure out how to get these interests going in the same direction, with as few trade-offs as possible.

In each of these--and many similar--cases, there is a strong temptation to rationalize these actions as an exercise of "social responsibility."

In the present climate of opinion, with its widespread aversion to "capitalism," "profits," the "soulless corporation" and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified on its own self-interest.

Here is a simple strategy for considering all your stakeholders in practice. Divide your screen or page into three columns; in the first column, list all stakeholders in order of perceived priority (Figure 1.5). Some individuals and groups play more than one role. For instance, some employees may be stockholders, some members of the community may be suppliers, and the government may be a customer of the firm. In the second column, list what you think each stakeholder group's interests and goals are. For those that play more than one role, choose the interests most directly affected by your actions.

In the third column, put the likely impact of your business decision on each stakeholder. This basic spreadsheet should help you identify all your stakeholders and evaluate your decision's impact on their interests. If you would like to add a human dimension to your analysis, try assigning some of your colleagues to the role of stakeholders and reexamine your analysis.

Normative ethics is about discovering right and delineating it from wrong; it is a way to develop the rules and norms we use to guide meaningful decision-making. The ethics in our single code are not relative to the time, person, or place.

In this world, we all wear different hats as we go about our daily lives as employees, parents, leaders, students. Being a truly ethical person requires that no matter what hat we wear, we exhibit a single ethical code and that it includes, among others, such universal principles of behavior as honesty, integrity, loyalty, fairness, respect for law, and respect for others.

Earlier in this chapter, we explained that stakeholders are all the individuals and groups affected by a business's decisions. Among these stakeholders are stockholders (or shareholders), individuals and institutions that own stock (or shares) in a corporation. Understanding the impact of a business decision on the stockholder and various other stakeholders is critical to the ethical conduct of business.

Indeed, prioritizing the claims of various stakeholders in the company is one of the most challenging tasks business professionals face. Considering only stockholders can often result in unethical decisions; the impact on all stakeholders must be considered and rationally assessed

In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money.

Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.

What is utility? Bentham's fundamental axiom, which underlies utilitarianism, was that all social morals and government legislation should aim for producing the greatest happiness for the greatest number of people. Utilitarianism, therefore, emphasizes the consequences or ultimate purpose of an act rather than the character of the actor, the actor's motivation, or the particular circumstances surrounding the act.

It has these characteristics: (1) universality, because it applies to all acts of human behavior, even those that appear to be done from altruistic motives; (2) objectivity, meaning it operates beyond individual thought, desire, and perspective; (3) rationality, because it is not based in metaphysics or theology; and (4) quantifiability in its reliance on utility.

Being successful at work may therefore consist of much more than simply earning money and promotions. It may also mean treating our employees, customers, and clients with honesty and respect. It may come from the sense of pride we feel about engaging in honest transactions, not just because the law demands it but because we demand it of ourselves.

It may lie in knowing the profit we make does not come from shortchanging others. Thus, business ethics guides the conduct by which companies and their agents abide by the law and respect the rights of their stakeholders, particularly their customers, clients, employees, and the surrounding community and environment. Ethical business conduct permits us to sleep well at night.

Integrity—that is, unity between what we say and what we do—is a highly valued trait. But it is more than just consistency of character. Acting with integrity means we adhere strongly to a code of ethics, so it implies trustworthiness and incorruptibility. Being a professional of integrity means consistently striving to be the best person you can be in all your interactions with others.

It means you practice what you preach, walk the talk, and do what you believe is right based upon reason. Integrity in business brings many advantages, not the least of which is that it is a critical factor in allowing business and society to function properly.

On the other hand, Kant's categorical imperative is just that: categorical or unconditional. It calls for morally upright behavior regardless of external circumstance or the historical context of a proposed act or decision. Kant affirmed that "the moral law is an imperative, which commands categorically, because the law is unconditioned." Unconditional ethics could be a challenge for a global organization dealing with suppliers, customers, and competitors in sometimes vastly different cultures.

It raises a larger philosophical issue: namely, was Kant correct in believing that morality and mental categories are independent of experience? Or can they be culturally conditioned, and, if so, does that make them relative rather than absolute, as Kant believed them to be?

As you might expect, utilitarianism was not without its critics. Thomas Hodgskin (1787-1869) pointed out what he said was the "absurdity" of insisting that "the rights of man are derived from the legislator" and not nature. In a similar vein, the poet Samuel Taylor Coleridge (1772-1834) accused Bentham of mixing up morality with law. Others objected that utilitarianism placed human beings on the same level as animals and turned people into utility functions. There were also complaints that it was mechanistic, antireligious, and too impractical for most people to follow.

John Stuart Mill sought to answer these objections on behalf of his mentor but then offered a synthesis of his own that brought natural rights together with utility, creating a new kind of utilitarianism, one that would eventually serve to underpin neoclassical economic principles.

Kant credited the skepticism of empirical philosopher David Hume (1711-1776) with awakening him from "dogmatic slumber," although he disagreed with Hume, who claimed that the mind did not exist at all but was the result of mental associations derived from sensory experience. For Kant, reality could be discerned not through reasoning or sensory experience alone but only by understanding the nature of the human mind.

Kant argued that sensory experience did not create the mind but rather that the mind created experience through its internal structures. And within the mind's complex structures there also existed an inherent and unconditional duty to act ethically, which Kant called the "categorical imperative," first outlined in Groundwork of the Metaphysic of Morals (1785).

In its initial form, Kant's described his concept of the categorical imperative as follows: "Act only according to that maxim whereby you can, at the same time, will that it should become a universal law." Kant's categorical (or unconditional) imperative has practical applications for the study of ethics. The categorical imperative contains two major suppositions: (1) We must act on the basis of goodwill rather than purely on self-interested motives that benefit ourselves at the expense of others; (2) we must never treat others as means toward ends benefitting ourselves without consideration of them also as ends in themselves.

Kant held that observing the categorical imperative as we consider what actions to take would directly lead to ethical actions on our part.

In Kant's view, rationalism and empiricism prevented people from perceiving the truth about their own nature. What was that truth? What was sufficient to constitute it?

Kant identified an a priori world of knowledge and understanding in which truth lay in the structures and categories of the mind that were beyond perception and reason. This was a radical concept for the times.

So, managing goals and incentives is much more nuanced than many managers realize. Management should be able to say with certainty that the goals they set are achievable—given employee skills, the resources available to them, and other relevant criteria.

Managers should also request employee input about whether employees can meet the bottom-line performance goals ethically since, under enough pressure, even good employees will take ethical shortcuts.

Yet another reason to adopt a universal ethical standard is the transparent character it nurtures in us. If a company's leadership insists that it stands for honest business transactions at every turn, it cannot prosecute those who defraud the company and look the other way when its own officers do the same.

Stakeholders recognize such hypocrisy and rightly hold it against the business's leaders.

In a September 2016 congressional hearing, Stumpf famously testified, "I care about outcomes, not process." It is important that executives reject this wrongheaded mindset, which narrows focus on the numbers rather than the quality of the work, or whether it is carried out ethically.

Managers should establish ethical expectations for how employees accomplish their measurable, bottom-line goals—for example, by including goals (and measures of their achievement) for values-based behaviors. For instance, perceptions of an employee as honest and trustworthy, as someone who treats others with respect, who develops long-term relationships with customers, and more.

To illustrate the concept of consequentialism, consider the hypothetical story told by Harvard psychologist Fiery Cushman. When a man offends two volatile brothers with an insult, Jon wants to kill him; he shoots but misses.

Matt, who intends only to scare the man but kills him by accident, will suffer a more severe penalty than his brother in most countries (including the United States). Applying utilitarian reasoning, can you say which brother bears greater guilt for his behavior? Are you satisfied with this assessment of responsibility? Why or why not?

In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.

Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straight-forward, and the persons among whom a voluntary contractual arrangement exists are clearly defined.

Although no ethical framework is perfect or fits a particular era completely, Rawls's justice theory has distinct advantages when applied to business in the twenty-first century. First, as businesses become interdependent and globalized, they must pay more attention to quality control, human resources, and leadership in diverse settings. What will give greater legitimacy to an organization in these areas than fairness? Fairness is a value that is cross-cultural, embraced by different social groups, and understood by nearly everyone. However, what is considered fair depends on a variety of factors, including underlying values and individual characteristics like personality. For instance, not everyone agrees on whether or how diversity ought to be achieved.

Neither is there consensus about affirmative action or the redistribution of resources or income. What is fair to some may be supremely unfair to others. This presents an opportunity for engaged debate and participation among the members of Rawls's community.

Today's business world yields "continuous creation," not the old story's "creative destruction." Many resources may be limited, but human ingenuity and imagination are not, especially when inspired by a sense of purpose. Think about Amazon (and its recent acquisition, Whole Foods Market), Genentech, Apple, Facebook, and Google — all are high-purpose, stakeholder-oriented companies, based on creating value for multiple stakeholders.

No business is perfect, and every business can improve, but it is time to end the myth that Wall Street is disconnected from Main Street. Get executives focused on value creation for real people, and products, services, and jobs will appear.

And to be clear: Cobbling together ideas like "corporate social responsibility" is ineffective. Friedman was wrong nearly 50 years ago when he argued that the only business of business is to make profits for shareholders, but he was right when he urged businesspeople to stick to business.

Notable executives like former General Electric CEO Jack Welch have agreed. "On the face of it, shareholder value is the dumbest idea in the world," Welch told the Financial Times in 2009. "Shareholder value is a result, not a strategy. ... Your main constituencies are your employees, your customers, and your products."

Rawls's principles and steps assume that the way in which the redistribution of goods and services occurs would be agreed upon by people in the community to avoid any fairness issues. But questions remain. For one, Rawls's justice, like the iconic depiction, is blind and cannot see the circumstances in which goods and services are distributed. Second, we may question whether a notion of fairness is really innate. Third, despite the claim that justice theory is not consequentialist (meaning outcomes are not the only thing that matters), there is a coercive aspect to Rawls's justice once the contract is in force, replacing utility with mandated fairness. Fourth, is this the kind of system in which people thrive and prosper, or, by focusing on the worst off, are initiative, innovation, and creativity dampened on the part of everyone else? Perhaps the most compelling critic of Rawls in this regard was his colleague at Harvard University, Robert Nozick (1938-2002), who wrote A Theory of Entitlement (1974) as a direct rebuttal of Rawlsian justice theory.

Nozick argued that the power of the state may never ethically be used to deprive someone of property he or she has legally obtained or inherited in order to distribute it to others who are in need of it.

Still, one of the advantages of justice theory over the other ethical systems presented in this chapter is its emphasis on method as opposed to content. The system runs on a methodology or process for arriving at truth through the underlying value of fairness. Again, in this sense it is similar to utilitarianism, but, by requiring unanimity, it avoids the extremes of Bentham's and Mill's versions. As a method in ethics, it can be applied in a variety of ways and in multiple disciplines, because it can be adapted to just about any value-laden content.

Of course, this raises the question of content versus method in ethics, especially because ethics has been defined as a set of cultural norms based on agreed-upon values. Method may be most effective in determining what those underlying values are, rather than how they are implemented.

The law is typically indebted to tradition and precedence, and compelling reasons are needed to support any change. Ethical reasoning often is more topical and reflects the changes in consciousness that individuals and society undergo.

Often, ethical thought precedes and sets the stage for changes in the law.

The short-sightedness is also exemplified in speeches by businessmen on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces.

Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.

Why should stakeholders care about a company acting above and beyond the ethical and legal standards set by society? Simply put, being ethical is simply good business. A business is profitable for many reasons, including expert management teams, focused and happy employees, and worthwhile products and services that meet consumer demand.

One more and very important reason is that they maintain a company philosophy and mission to do good for others.

Yet, business had an interesting effect that helped invigorate Athenian life and encouraged those engaged in it to be virtuous (or else risk their reputation). This effect was association. Business was based on the free and fair exchange of goods, which brought not only items of merchandise into association with each other but also buyers, sellers, and public officials. The way to ensure ethically sound association was through the exercise of prudence, especially in its demand that people act not rashly but deliberately. This deliberative aspect of prudence provided a way for buyers, sellers, and everyone engaged in a transaction to act honorably, which was of the utmost importance. Honor was not only a foundational virtue but the cultural environment in which the ancient world existed.

One of the worst offenses anyone could commit, whether man, woman, free, or slave, was to act in a dishonorable way. Of course, although acting deliberately does not guarantee that one is acting honorably, for Athenians, acting in a calculated way was not an indication of dishonor. Dishonorable acts included any that disturbed the basic order (dikē) of life in which everyone had a role, including the gods.

From a Kantian perspective, it is clear that adherence to duty is what builds the framework for ethical acts. This is in direct contradiction of Bentham's view of human nature as selfish and requiring an objective calculus for ethical action to result. Kant rejected the idea of such a calculus and believed, instead, that perceptions were organized into preexisting categories or structures of the mind. Compare his notion of an ordered and purposeful universe of laws with the similar logos, or logic, of the ancient Greeks.

One of those laws included implementation of the categorical imperative to act ethically, in accordance with our conscience. However, even though that imperative ought to be followed without exception, not everyone does so. In Kant's moral teachings, individuals still had free will to accept or reject it.

Aquinas further divided Aristotelian prudence into memory, reason, understanding, docility, shrewdness, foresight, circumspection, and caution. To use these qualities in a constructive way, a business person had to direct them toward an appropriate end, which applies to business today just as it did in fourth-century Athens. A merchant could not make money in a random way but had to keep the needs of customers in mind and conduct business with fair prices and fees. This exercise of prudence was part of the cosmic order that ensured the right management of the home, the marketplace, and civilization itself. Similarly, committing fraud or deception to achieve an end, even if that end were good or just, was not considered an honorable act.

Only when ends and means were aligned and worked in harmony were those engaged in the transaction considered virtuous. This virtue, in turn, would lead to the happiness Aristotle envisioned and toward which his entire system of virtue ethics aimed.

Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions. To illustrate, it may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.

Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.

What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment.

Or that, at the expense of corporate profits, he is to hire "hardcore" unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

The most notable feature of virtue ethics is that it viewed the basic ethical unit—the fundamental agent of morality—as the individual, who lived out his or her worldview publicly. A life of virtue, therefore, took place in the economic and political spheres so that others might participate in and benefit from it. In Athenian society, it was important for business to be conducted competently and ethically. Even though Aristotle was suspicious of business, he acknowledged its importance in preserving and nurturing Athenian democracy. He also praised the creation of money to further the goal of justice, so that a shoemaker and a housebuilder, for instance, could trade their wares on an equal basis. Virtue in the marketplace was demonstrated through ethical behavior, according to Aristotle: "People do in fact seek their own good, and think that they are right to act in this way. It is from this belief that the notion has arisen that such people are prudent.

Presumably, however, it is impossible to secure one's own good independently of domestic and political science."7 This belief in the public nature of virtue was crucial for the flourishing of the city-state and also has implications for contemporary business, which must consider the individual, organization, industry, and society in its development and planning.

The third normative approach, typically called virtue theory, focuses on the character of the decision maker—a character that reflects the training we receive growing up. In this view, our ethical analysis of a decision is intimately connected with the person we choose to be. It is through the development of habits, the routine actions in which we choose to engage, that we are able to create a character of integrity and make ethical decisions.

Put differently, if a two-year-old is taught to take care of and return borrowed toys even though this runs contrary to every instinct they have, they may continue to perfect their ethical behavior so that at age forty, they can be counted on to safeguard the tens of millions of dollars investors have entrusted to their care in brokerages.

Utilitarianism is a consequentialist theory. In consequentialism, actions are judged solely by their consequences, without regard to character, motivation, or any understanding of good and evil and separate from their capacity to create happiness and pleasure. Thus, in utilitarianism, it is the consequences of our actions that determine whether those actions are right or wrong. In this way, consequentialism differs from Aristotelian and Confucian virtue ethics, which can accommodate a range of outcomes as long as the character of the actor is ennobled by virtue. For Bentham, character had nothing to do with the utility of an action. Everyone sought pleasure and avoided pain regardless of personality or morality. In fact, too much reliance on character might obscure decision-making.

Rather than making moral judgments, utilitarianism weighed acts based on their potential to produce the most good (pleasure) for the most people. It judged neither the good nor the people who benefitted. In Bentham's mind, no longer would humanity depend on inaccurate and outdated moral codes. For him, utilitarianism reflected the reality of human relationships and was enacted in the world through legislative action.

Rawls's justice theory contains three principles and five procedural steps for achieving fairness. The principles are (1) an "original position," (2) a "veil of ignorance," and (3) unanimity of acceptance of the original position. By original position, Rawls meant something akin to Hobbes' understanding of the state of nature, a hypothetical situation in which rational people can arrive at a contractual agreement about how resources are to be distributed in accordance with the principles of justice as fairness. This agreement was intended to reflect not present reality but a desired state of affairs among people in the community. The veil of ignorance (Figure 2.10) is a condition in which people arrive at the original position imagining they have no identity regarding age, sex, ethnicity, education, income, physical attractiveness, or other characteristics. In this way, they reduce their bias and self-interest. Last, unanimity of acceptance is the requirement that all agree to the contract before it goes into effect.

Rawls hoped this justice theory would provide a minimum guarantee of rights and liberties for everyone, because no one would know, until the veil was lifted, whether they were male, female, rich, poor, tall, short, intelligent, a minority, Roman Catholic, disabled, a veteran, and so on.

Measuring true profitability, however, requires taking a long-term perspective. We cannot accurately measure success within a quarter of a year; a longer time is often required for a product or service to find its market and gain traction against competitors, or for the effects of a new business policy to be felt.

Satisfying consumers' demands, going green, being socially responsible, and acting above and beyond the basic requirements all take time and money. However, the extra cost and effort will result in profits in the long run. If we measure success from this longer perspective, we are more likely to understand the positive effect ethical behavior has on all who are associated with a business.

We learned a lot about these processes through a co-authored research project based on 15 months of observational data in a large telecommunications company (over 10,000 employees), where we examined the conduct of managers and their sales staff.

Senior leaders at this company set unrealistic performance goals for their sales staff as part of a broad, cost-reduction strategy to shift from pricey sales staff in the field to less expensive sales staff, "desk salespeople," who sold products over the phone.

Adopting a consistent ethical standard is both selfless and in the manager's self-interest. That is, would-be customers and clients are more likely to seek out a business that treats all with whom it interacts with honesty and fairness, believing that they themselves will be treated likewise by that firm.

Similarly, business leaders who treat everyone in a trustworthy manner need never worry that they might not have impressed a potential customer, because they always engage in honorable commercial practices. A single standard of business behavior that emphasizes respect and good service appeals to all.

The first normative approach is to examine the ends, or consequences, a decision produces in order to evaluate whether those ends are ethical. Variations on this approach include utilitarianism, teleology, and consequentialism. For example, utilitarianism suggests that an ethical action is one whose consequence achieves the greatest good for the greatest number of people.

So if we want to make an ethical decision, we should ask ourselves who is helped and who is harmed by it. Focusing on consequences in this way generally does not require us to take into account the means of achieving that particular end, however. That fact leads us to the second normative theory about what constitutes ethical conduct.

Virtue theory has its roots in the Greek philosophical tradition, whose followers sought to learn how to live a flourishing life through study, teaching, and practice. The cardinal virtues to be practiced were courage, self-control, justice, and wisdom.

Socrates was often cited as a sage and a role model, whose conduct in life was held in high regard.

Organizations that compromise the interests of one stakeholder with the interests of another quickly find that, in today's world, there is simply no place to hide.

Someone will figure out how to do the business better without the trade-offs.

Clients, customers, suppliers, investors, retailers, employees, the media, the government, members of the surrounding community, competitors, and even the environment are stakeholders in a business; that is, they are individuals and entities affected by the business's decisions (Figure 1.2).

Stakeholders typically value a leadership team that chooses the ethical way to accomplish the company's legitimate for-profit goals. For example, Patagonia expresses its commitment to environmentalism via its "1% for the Planet" program, which donates 1 percent of all sales to help save the planet. In part because of this program, Patagonia has become a market leader in outdoor gear.

Business leaders are not limited to only one of the normative ethical theories we have described, however. Virtue theory, utilitarianism, and deontology all have advantages to recommend them.

Still, what should not change is a corporate commitment to not make exceptions in its practices when those favor the company at the expense of customers, clients, or other stakeholders.

Few directives in business can override the core mission of maximizing shareholder wealth, and today that particularly means increasing quarterly profits.

Such an intense focus on one variable over a short time (i.e., a short-term perspective) leads to a short-sighted view of what constitutes business success.

The concept of an "insider" is broad and includes officers, directors, and employees of a company issuing securities. A person can even constitute what is called a "temporary insider" if he or she temporarily assumes a unique confidential relationship with a firm and, in doing so, acquires confidential information centered on the firm's financial and operational affairs.

Temporary insiders can be investment bankers, brokers, attorneys, accountants, or other professionals typically thought of as outsiders, such as newspaper and television reporters.

But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collective doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means.

That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "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, which is to say, engages in open and free competition without deception or fraud."

Decades ago, some management theorists argued that a conscientious manager in a for-profit setting acts ethically by emphasizing solely the maximization of earnings. Today, most commentators contend that ethical business leadership is grounded in doing right by all stakeholders directly affected by a firm's operations, including, but not limited to, stockholders, or those who own shares of the company's stock.

That is, business leaders do right when they give thought to what is best for all who have a stake in their companies. Not only that, firms actually reap greater material success when they take such an approach, especially over the long run.

Here's what we argue: The social responsibility of business is to create value for stakeholders. That means its customers, suppliers, employees, and communities, as well as its shareholders.

That means its customers, suppliers, employees, and communities, as well as its shareholders.

Interestingly, the Aristotelian approach to business did not condemn money making or the accumulation of riches. What concerned Aristotle, particularly because of its harmful effects on the individual and the city-state, was greed. Aristotle considered greed an excess that tipped the scales of justice and led to scandal. Money might constitute the bait, but greed causes the person to reach out and grab as much as possible, falling into the trap of scandal.

The Greeks considered the exercise of greed an irrational, and therefore ignoble, act. Only attention to honor and deliberative prudence could save someone from acting so foolishly.

A famous case of insider trading, Securities and Exchange Commission v. Texas Gulf Sulphur Co. (1968), began with the discovery of the Kidd Mine and implicated the employees of Texas mining company. When first notified of the discovery of a large and very valuable copper deposit, mine employees bought stock in the company while keeping the information secret. When the information was released to the public, the price of the stock went up and the employees sold their stock, making a significant amount of money.

The SEC and the Department of Justice prosecuted the employees for insider trading and won a conviction; the employees had to give back all the money they had made on their trades. Insider trading cases are often highly publicized, especially when charges are brought against high-profile figures.

However, as Ethical Systems Executive Director Azish Filabi wrote, explaining the study we published in Organization Science, "because the desk sales team cheated the internal systems, the company didn't actually gain the cost savings that it thought it had.

The apparent success of the desk sales team (based on false information fed into the management information-system) led upper management to reduce the number of field-staff sales members, which undermined an important sales channel at the firm."

By now, many have heard how it all began: In 2016 it was revealed that the bank fired over 5,300 employees for opening millions of potentially unauthorized or fraudulent customer accounts between 2011 and 2016. These "sales integrity issues," as the bank put it, likely date back to at least 2002. Then in 2017, news came that Wells Fargo had charged unwarranted mortgage fees between 2013 and 2017 and foisted unneeded auto insurance on many of its customers, causing thousands to default on their car loans and have their vehicles repossessed. Last year, the public learned that Wells Fargo had also foreclosed on hundreds of homes due to a technological glitch.

The bank recently agreed to shell out $575 million to settle claims with U.S. states. Matt Eagan, a CNN Business reporter, has been chronicling the bank's failures since they began. "Wells Fargo initially minimized the millions of fake bank and credit card accounts as wrongdoing by bad actors," he wrote last month. "It only later admitted the existence of [a] widespread cultural problem."

When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life.

The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are--or would be if they or anyone else took them seriously--preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.

As an example, consider the business practices of Toyota when it first introduced its vehicles for sale in the United States in 1957. For many years, Toyota was content to sell its cars at a slight loss because it was accomplishing two business purposes: It was establishing a long-term relationship of trust with those who eventually would become its loyal U.S. customers, and it was attempting to disabuse U.S. consumers of their belief that items made in Japan were cheap and unreliable.

The company accomplished both goals by patiently playing its long game, a key aspect of its operational philosophy, "The Toyota Way," which includes a specific emphasis on long-term business goals, even at the expense of short-term profit.

Bentham was interested in reducing utility to a single index so that units of it could be assigned a numerical and even monetary value, which could then be regulated by law. This utility function measures in "utils" the value of a good, service, or proposed action relative to the utilitarian principle of the greater good, that is, increasing happiness or decreasing pain. Bentham thus created a "hedonic calculus" to measure the utility of proposed actions according to the conditions of intensity, duration, certainty, and the probability that a certain consequence would result. He intended utilitarianism to provide a reasoned basis for making judgments of value rather than relying on subjectivity, intuition, or opinion.

The implications of such a system on law and public policy were profound and had a direct effect on his work with the British House of Commons, where he was commissioned by the Speaker to decide which bills would come up for debate and vote. Utilitarianism provided a way of determining the total amount of utility or value a proposal would produce relative to the harm or pain that might result for society.

The five procedural steps, or "conjectures," are (1) entering into the contract, (2) agreeing unanimously to the contract, (3) including basic conditions in the contract such as freedom of speech, (4) maximizing the welfare of the most disadvantaged persons, and (5) ensuring the stability of the contract. These steps create a system of justice that Rawls believed gave fairness its proper place above utility and the bottom line. The steps also supported his belief in people's instinctual drive for fairness and equitable treatment. Perhaps this is best seen in an educational setting, for example, the university. By matriculating, students enter into a contract that includes basic freedoms such as assembly and speech. Students at a disadvantage (e.g., those burdened with loans, jobs, or other financial constraints) are accommodated as well as possible.

The contract between the university and students has proven to be stable over time, from generation to generation. This same procedure applies on a micro level to the experience in the classroom between an individual teacher and students. Over the past several decades—for better or worse—the course syllabus has assumed the role of a written contract expressing this relationship.

A company's name, its corporate logo, and its trademark will necessarily increase in value as stakeholders view that company in a more favorable light. A good reputation is essential for success in the modern business world, and with information about the company and its actions readily available via mass media and the Internet (e.g., on public rating sites such as Yelp), management's values are always subject to scrutiny and open debate. These values affect the environment outside and inside the company.

The corporate culture, for instance, consists of shared beliefs, values, and behaviors that create the internal or organizational context within which managers and employees interact. Practicing ethical behavior at all levels—from CEO to upper and middle management to general employees—helps cultivate an ethical corporate culture and ethical employee relations.

Mill's father, James, was a contemporary and associate of Bentham's who made sure his son was tutored in a rigorous curriculum. According to Mill, at an early age he learned enough Greek and Latin to read the historians Herodotus and Tacitus in their original languages. His studies also included algebra, Euclidean geometry, economics, logic, and calculus. His father wanted him to assume a leadership position in Bentham's political movement, known as the Philosophical Radicals. Unfortunately, the intensity and duration of Mill's schooling—utilitarian conditions of education—were so extreme that he suffered a nervous breakdown at the age of twenty years.

The experience left him dissatisfied with Bentham's philosophy of utility and social reform. As an alternative, Mill turned to Romanticism and poets like Coleridge and Johann Wolfgang Goethe (1749-1832). What he ended up with, however, was not a rejection of utilitarianism but a synthesis of utility and human rights.

Second, as we saw earlier, justice theory provides a method for attaining fairness, which could make it a practical and valuable part of training at all levels of a company.

The fact that its content—justice and fairness—is more accessible to contemporary people than Confucian virtue ethics and more flexible than Kant's categorical imperative makes it an effective way of dealing with stakeholders and organizational culture.

According to Aristotle, and later thinkers who expanded upon his work, such as thirteenth-century philosopher and theologian Thomas Aquinas, to act dishonorably casts disrepute on all concerned. Ends and means had to be aligned, particularly in business, which provided people's livelihoods and secured the economic health of the city-state. Acting honorably meant trying to be magnanimous in all transactions and rising above obsession with baser instincts. The honorable person was magnanimous, prudent, fair, and interested in self-advancement as long as it did not injure personal integrity or the body politic.

The importance of prudence is evident because, said Aristotle, it is "concerned with human goods, i.e., things about which deliberation is possible; for we hold that it is the function of the prudent man to deliberate well; and nobody deliberates about things that cannot be otherwise, or that are not means toward an end, and that end is a practical good. And the man who is good at deliberation generally is the one who can aim, by the help of his calculation, at the best of the goods attainable."

The Great Recession of the late 2000s should have made one thing abundantly clear: The way we have been encouraged to think about business is no longer appropriate — if it ever was. In the 21st century, there is too much complexity and too much uncertainty for a focus on "maximizing profits this quarter" to work very well.

The landscape is littered with companies that tried this, and they simply did not understand — either because they could not understand or refused to understand — the complex consequences of their actions. This led to the demise of investment banking company Lehman Brothers, the bankruptcy of automotive company General Motors Corp., and the crash of countless smaller businesses. It cost U.S. citizens trillions of dollars.

Unlike utilitarianism, which forms the philosophical foundation for most cost-benefit analysis in business, Kantian ethics is not so easily applied. On one hand, it offers a unique opportunity for the development of individual morality through the categorical imperative to act ethically, which emphasizes humanity and autonomy. This imperative addresses one major side of business ethics: the personal. Character and moral formation are crucial to creating an ethical culture. Indeed, business ethics is littered with cases of companies that have suffered damaging crises due to their leaders' lack of commitment to act on the basis of a good will and with regard for what benefits others. Recent examples include Uber, where a toxic work environment was allowed to prevail, and Volkswagen, which knowingly misrepresented the emissions level of its cars. Such examples exist in government as well, as the recent Theranos and "Fat Leonard" scandals confirm.

The latter consisted of graft and corruption in the U.S. Navy's Pacific fleet and has been a continual source of embarrassment for an institution that prides itself on the honorable conduct of its officers. One person can make a difference, either positively or negatively.

Other stakeholders, such as state governments, NGOs, citizen groups, and political action committees in the United States apply social and legal pressure on businesses to improve their environmental practices. For example, the state of California in 2015 enacted a set of laws, referred to as the California Transparency in Supply Chains Act, which requires firms to report on the working conditions of the employees of their suppliers. The law requires only disclosures, but the added transparency is a step toward holding U.S. and other multinational corporations responsible for what goes on before their products appear in shiny packages in stores.

The legislators who wrote California's Supply Chains Act recognize that consumer stakeholders are likely to bring pressure to bear on companies found to use slave labor in their supply chains, so forcing disclosure can bring about change because corporations would rather adjust their relationships with supply-chain stakeholders than risk alienating massive numbers of customers.

Where Bentham looked to numerical formulas for determining value, relying on the objectivity of numbers, Mill sought value in reason and in the power of language to clarify where truth lies.

The lesson for contemporary business, especially with the rise of big data, is that we need both numbers and reasoned principles. If we apply the Aristotelian and Confucian rule of the mean, we see that balance of responsibility and profitability makes the difference between sound business practices and poor ones.

The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate.

There are not values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.

Why are the insights of these Greek philosophers still relevant today? One reason is their development of the ancient concept of virtue.

The person most closely associated with virtue in the West, and the development of what is now known as virtue ethics—that is, an ethical system based upon the exercise of certain virtues (loyalty, honor, courage) emphasizing the formation of character—is Plato's famous pupil Aristotle (384-322 BCE) (Figure 2.2).

How can corporations and their stakeholders measure some of the effects of CSR programs? The triple bottom line (TBL) offers a way. TBL is a measure described in 1994 by John Elkington, a British business consultant (Figure 3.6), and it forces us to reconsider the very concept of the "bottom line." Most businesses, and most consumers for that matter, think of the bottom line as a shorthand expression of their financial well-being. Are they making a profit, staying solvent, or falling into debt? That is the customary bottom line, but Elkington suggests that businesses need to consider not just one but rather three measures of their true bottom line: the economic and also the social and environmental results of their actions.

The social and environmental impacts of doing business, called people and planet in the TBL, are the externalities of their operations that companies must take into account.

The stakeholder approach aims to create a new narrative about business — a new story — that enables great companies to make our communities and our lives better through the creation of stakeholder value, rather than simply profit to shareholders. The story includes a recognition that if we want the outcome of business to be a more responsible capitalism, it requires stakeholders to value business responsibility.

The story includes a recognition that if we want the outcome of business to be a more responsible capitalism, it requires stakeholders to value business responsibility.

Betty Friedan's The Feminine Mystique (1963) critiqued the way twentieth-century industrialization boxed women into traditional roles and limited their agency. Kate Chopin's novel The Awakening (1899) and the nineteenth-century novels of Jane Austen had already outlined how limited options were for women despite massive social and economic shifts in the industrializing West. Stakeholder communities left out of or directly harmed by the economic revolution have demanded that they be able to influence corporate and governmental economic practices to benefit more directly from corporate growth as well as entrepreneurship opportunities.

The trend to adopt CSR may represent an opportunity for greater engagement and involvement by groups mostly ignored until now by the wave of corporate economic growth reshaping the industrialized world.

CSR in its ideal form focuses managers on demonstrating the social good of their new products and endeavors. It can be framed as a response to the backlash corporations face for a long track record of harming environments and communities in their efforts to be more efficient and profitable. Pushback is not new. Charles Dickens wrote about the effects of the coal economy on nineteenth-century England and shaped the way we think about the early industrial revolution.

The twentieth-century writer Chinua Achebe, among many others, wrote about colonization and its transformative and often painful effect on African cultures. Rachel Carson first brought public attention to corporation's chemical poisoning of U.S. waterways in her 1962 book Silent Spring.

What contributes to a corporation's positive image over the long term? Many factors contribute, including a reputation for treating customers and employees fairly and for engaging in business honestly. Companies that act in this way may emerge from any industry or country. Examples include Fluor, the large U.S. engineering and design firm; IllyCaffè, the Italian food and beverage purveyor; Marriott, the giant U.S. hotelier; and Nokia, the Finnish telecommunications retailer.

The upshot is that when consumers are looking for an industry leader to patronize and would-be employees are seeking a firm to join, companies committed to ethical business practices are often the first to come to mind.

Why rights? No doubt, Mill's early life and formation had a great deal to do with his championing of individual freedom. He believed the effort to achieve utility was unjustified if it coerced people into doing things they did not want to do. Likewise, the appeal to science as the arbiter of truth would prove just as futile, he believed, if it did not temper facts with compassion. "Human nature is not a machine to be built after a model, and set to do exactly the work prescribed for it, but a tree, which requires to grow and develop itself on all sides, according to the tendency of the inward forces which make it a living thing," he wrote. Mill was interested in humanizing Bentham's system by ensuring that everyone's rights were protected, particularly the minority's, not because rights were God given but because that was the most direct path to truth.

Therefore, he introduced the harm principle, which states that the "only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant."

Thus, a company enters a social contract with society as whole, an implicit agreement among all members to cooperate for social benefits. Even as a company pursues the maximizing of stockholder profit, it must also acknowledge that all of society will be affected to some extent by its operations. In return for society's permission to incorporate and engage in business, a company owes a reciprocal obligation to do what is best for as many of society's members as possible, regardless of whether they are stockholders.

Therefore, when applied specifically to a business, the social contract implies that a company gives back to the society that permits it to exist, benefiting the community at the same time it enriches itself.

An additional perspective to take concerning CSR is that ethical business leaders opt to do good at the same time that they do well. This is a simplistic summation, but it speaks to how CSR plays out within any corporate setting. The idea is that a corporation is entitled to make money, but it should not only make money. It should also be a good civic neighbor and commit itself to the general prospering of society as a whole. It ought to make the communities of which it is part better at the same time it pursues legitimate profit goals.

These ends are not mutually exclusive, and it is possible—indeed, praiseworthy—to strive for both. When a company approaches business in this fashion, it is engaging in a commitment to corporate social responsibility.

Nearly all systems of religious belief stress the building blocks of engaging others with respect, empathy, and honesty.

These foundational beliefs, in turn, prepare us for the codes of ethical behavior that serve as ideal guides for business and the professions. Still, we need not subscribe to any religious faith to hold that ethical behavior in business is still necessary. Just by virtue of being human, we all share obligations to one another, and principal among these is the requirement that we treat others with fairness and dignity, including in our commercial transactions.

Some professions, such as medicine and the law, have traditional codes of ethics. The Hippocratic Oath, for example, is embraced by most professionals in health care today as an appropriate standard always owed to patients by physicians, nurses, and others in the field. This obligation traces its lineage to ancient Greece and the physician Hippocrates. Business is different in not having a mutually shared standard of ethics. This is changing, however, as evidenced by the array of codes of conduct and mission statements many companies have adopted over the past century.

These have many points in common, and their shared content may eventually produce a code universally claimed by business practitioners. What central point might constitute such a code? Essentially, a commitment to treat with honesty and integrity customers, clients, employees, and others affiliated with a business.

To be sure, there are limitations to Mill's version of utilitarianism, just as there were with the original. For one, there has never been a satisfactory definition of "harm," and what one person finds harmful another may find beneficial. For Mill, harm was defined as the set back of one's interests. Thus, harm was defined relative to an individual's interests. But what role, if any, should society play in defining what is harmful or in determining who is harmed by someone's actions? For instance, is society culpable for not intervening in cases of suicide, euthanasia, and other self-destructive activities such as drug addiction?

These issues have become part of the public debate in recent years and most likely will continue to be as such actions are considered in a larger social context. We may also define intervention and coercion differently depending on where we fall on the political spectrum.

Like a modern metropolis, the city-state (polis) of Athens in the fifth century BCE drew people from far afield who wanted a better life. For some, that life meant engaging in trade and commerce, thanks to the openness of the new democracy established under the lawgiver Cleisthenes in 508 BCE. Others were drawn to Athens' incredibly rich architecture, poetry, drama, religious practices, politics, and schools of philosophy. Youth traveled there hoping to study with such brilliant teachers as the mathematicians Archimedes and Pythagoras; dramatists like Sophocles and Euripides; historians Herodotus and Thucydides; Hippocrates, the father of medicine; and, of course, the renowned but enigmatic philosopher Socrates. More than being the equivalent of rock stars of their day, these thinkers, scholars, and artists challenged youth to pursue truth, no matter the cost to themselves or their personal ambitions.

These leaders were interested not in fame or even in personal development but in the creation of an ideal society. This was the Golden Age of ancient Greece, whose achievements were so profound and enduring that they have formed the pillars of Western civilization for nearly two and a half millennia.

The difficulty of exercising "social responsibility" illustrates, of course, the great virtue of private competitive enterprise--it forces people to be responsible for their own actions and makes it difficult for them to "exploit" other people for either selfish or unselfish purposes.

They can do good--but only at their own expense.

CSR used in good faith has the potential to reshape the orientation of multinational corporations to their stakeholders. By positioning themselves as stakeholders in a broader global community, conscientious corporations can be exemplary organizations. They can demonstrate interest and influence on a global scale and improve the way the manufacture of goods and delivery of services serve the local and global environment.

They can return to communities as much as they extract and foster automatic financial reinvestment so that people willing and able to work for them can afford not only the necessities but a chance to pursue happiness.

If Wells Fargo had hired 5,300 "bad apples," it should have examined its recruitment practices. The crucial lesson from Wells Fargo is that "bad apples," if they exist, are likely few in number. Contextual factors—such as bad leadership or poorly constructed goals and incentives—are more likely to be the root cause of bad behavior. Because these factors are often complex, and may implicate senior management (if the performance-management system is flawed, for example) managers may, intentionally or unintentionally, choose the easier path—fire the so-called "bad apples" and assume that all will be well. But that is almost never useful. If they are getting reports of unethical behavior, senior managers (and boards) should take those reports seriously and seek out the root cause.

This can be done through a culture assessment, in conjunction with an independent investigation process, to understand why the behavior is occurring and how the organization can best address it.

While senior leadership knew about the many reports of misconduct, they didn't look to their organization's performance management model or its culture as the root cause of the problem. Instead, they blamed individual "bad apples." But the problem wasn't bad apples and—especially in widespread cases of misconduct—the problem generally isn't bad apples. It is the bad barrel—the culture—that management creates. Consider how ridiculous it is to label thousands of employees "bad apples." Even if it is just a few employees who are engaged in similar bad behavior, managers should look carefully at their management systems to search for root causes.

This is hard. It is easy to pretend that you're solving the problem by eliminating bad employees. It is harder to admit that systems you designed might be contributing to the problem. The question that managers should ask is this: How is the system that we have designed incentivizing the bad behavior?

Moving from theory to daily life, we can also look at the way our reputation is established by the implicit and explicit messages we send to others. If we adopt ethical relativism, friends, family, and coworkers will notice that we use different standards for different contexts.

This lack of consistency and integrity can alter their perception of us and likely damage our reputation.

In our study we also found that when top management relied exclusively on the numbers reported from below, they did not receive an accurate or complete picture of the underlying dynamics of business operations.

This may be a startling realization for some executives: Senior managers and front-line employees need to interact relatively frequently so the leaders can be closer to the challenges employees face in their work. The old advice about "management by walking around" still applies.

The organization should look to its own ethical values for guidance and then weight ethical goal-achievement substantially (at least equal to bottom-line performance goal-achievement) in decisions about compensation and promotion.

This requires careful thought but it is doable, and that kind of system will speak volumes about how employees can succeed in the organization. A focus on the numbers only—especially if units operate autonomously, as was the case at Wells Fargo—makes it much more likely that managers (and their employees) will find any way to achieve them (or at least appear to do so).

Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and prestigious businessmen, does clearly harm the foundations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely far-sighted and clear-headed in matters that are internal to their businesses. They are incredibly short-sighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general.

This short-sightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies. There is nothing that could do more in a brief period to destroy a market system and replace it by a centrally controlled system than effective governmental control of prices and wages.

Rather like Aristotle and Confucius, Kant taught that the transcendent aspects of human nature, if followed, would lead us inevitably to treat people as ends rather than means. To be moral meant to renounce uninformed dogmatism and rationalism, abide by the categorical imperative, and embrace freedom, moral sense, and even divinity.

This was not a lofty or unattainable goal in Kant's mind, because these virtues constituted part of the systematic structuring of the human mind. It could be accomplished by living truthfully or, as we say today, authentically. Such a feat transcended the logic of both rationalism and empiricism.

Rawls gave an example of what he called "pure procedural justice" in which a cake is shared among several people. By what agreement shall the cake be divided? Rawls determined that the best way to divide the cake is to have the person slicing the cake take the last piece.

This will ensure that everyone gets an equal amount. What is important is an independent standard to determine what is just and a procedure for implementing it.

If consumers are aware only of Coca-Cola's advertising campaigns and corporate public relations writings online, they will miss the very real concerns about water security associated with it and other corporations producing beverages in similar fashion.

Thus it requires interest on the part of stakeholders to continue to drive real CSR practices and to differentiate true CSR efforts from greenwashing.

The second approach does examine the means, or actions, we use to carry out a business decision. An example of this approach is deontology, which essentially suggests that it is the means that lend nobility to the ends. Deontology contends that each of us owes certain duties to others (deon is a Greek word for duty or obligation) and that certain universal rules apply to every situation and bind us to these duties. In this view, whether our actions are ethical depends only on whether we adhere to these rules.

Thus, the means we use is the primary determinant of ethical conduct. The thinker most closely associated with deontology is the eighteenth-century German philosopher Immanuel Kant (Figure 1.3).

Positive goodwill generated by ethical business practices, in turn, generates long-term business success. As recent studies have shown, the most ethical and enlightened companies in the United States consistently outperform their competitors.

Thus, viewed from the proper long-term perspective, conducting business ethically is a wise business decision that generates goodwill for the company among stakeholders, contributes to a positive corporate culture, and ultimately supports profitability.

Business people sometimes apply different ethical standards in different contexts, especially if they are working in a culture different from the one in which they were raised or with coworkers from other traditions. If we look outside ourselves for ethical guidance, relying on the context in which we find ourselves, we can grow confused about what is ethical business behavior. Stakeholders then observe that the messages we send via our conduct lack a consistent ethical core, which can harm our reputation and that of the business.

To avoid falling back on ethical relativism, a philosophy according to which there is no right or wrong and what is ethical depends solely on the context, we must choose a coherent standard we can apply to all our interactions with others.

On the other hand, for some, CSR is nothing more than an opportunity for publicity as a firm tries to look good through various environmentally or socially friendly initiatives without making systemic changes that will have long-term positive effects. Carrying out superficial CSR efforts that merely cover up systemic ethics problems in this inauthentic way (especially as it applies to the environment), and acting simply for the sake of public relations is called greenwashing.

To truly understand a company's approach toward the environment, we need to do more than blindly accept the words on its website or its advertising.

As a practical way of measuring value, Bentham's system also plays a role in risk management. The utility function, or the potential for benefit or loss, can be translated into decision-making, risk assessment, and strategic planning.

Together with data analytics, market evaluations, and financial projections, the utility function can provide managers with a tool for measuring the viability of prospective projects. It may even give them an opportunity to explore objections about the mechanistic and impractical nature of utilitarianism, especially from a customer perspective.

The political principle that underlies the political mechanism is conformity. The individual must serve a more general social interest--whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.

Unfortunately, unanimity is not always feasible. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political mechanism altogether.

If you add to these debacles a whole series of high-profile, far-reaching scandals (Enron, Madoff, Wells Fargo, Volkswagen), where unscrupulous companies and their executives acted for themselves while pretending to do what was in the shareholder's interest, the old story simply collapses.

We can no longer afford to accept that businesspeople will be only self- and shareholder-interested, greedy little bastards divorced from the societal context in which they are embedded.

The relationship between the intellectual and the moral virtues was not as clear cut as it may appear, however, because Aristotle believed that action preceded character. In other words, the primary way to change character was through consistent, intentional behavior in the direction of virtue. Aristotle gave the example of courage. A person was not courageous first and then went about performing acts of courage. Rather, courage resulted from incremental change, small steps taken over time that molded the person's character. It relied on a recognition of justice, so that courage was directed toward the right end. The important task was developing the habit of leading the virtuous life. Anyone could do this; however, it was a discipline that had to be learned and practiced with dedication.

We can see that this habit of virtue is especially relevant for business today, when the temptation to conform to an established organizational culture is overwhelming even when that culture may permit and even encourage questionable practices. Add the seductive power of money, and anyone's courage might be tested.

This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public--after all, "taxation without representation" was one of the battle cries of the American Revolution.

We have a system of checks and balances to separate the legislative function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expenditure programs and from the judicial function of mediating disputes and interpreting the law.

Considering the social implications of an individual action highlights another limitation of utilitarianism, and one that perhaps makes more sense to us than it would to Bentham and Mill, namely, that it makes no provision for emotional or cognitive harm. If the harm is not measurable in physical terms, then it lacks significance. For example, if a reckless driver today irresponsibly exceeds the speed limit, crashes into a concrete abutment, and kills himself while totaling his vehicle (which he owns), utilitarianism would hold that in the absence of physical harm to others, no one suffers except the driver.

We may not arrive at the same conclusion. Instead, we might hold that the driver's survivors and friends, along with society as a whole, have suffered a loss. Arguably, all of us are diminished by the recklessness of his act.

We know that one immediate reaction of many executives of public companies will be, "Oh, but my fiduciary duty is to shareholders." Not so. Legal precedent suggests that courts have granted companies a great deal of flexibility in how they balance their stakeholders, including shareholders, in the interests of the business.

We see similar flexibility worldwide. Capitalism works because entrepreneurs and managers figure out how to get the interests of many going in the same direction.

This facet of "social responsibility" doctrine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officials are asked to subordinate the interest of their members to some more general purpose. If the union officials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank-and-file revolts and the emergence of strong competitors for their jobs.

We thus have the ironic phenomenon that union leaders--at least in the U.S.--have objected to Government interference with the market far more consistently and courageously than have business leaders.

Wells Fargo, in its formal ethics program, did train employees to avoid unethical behavior, and counseled them to call the company's ethics hotline if they suspected anyone was behaving unethically. Many employees did speak up, and the company retaliated, firing some who flagged unethical selling tactics. "They ruined my life," one former employee, who called the company ethics hotline, told CNN.

Well, that sent a resounding message to employees! Eventually, thousands of front-line employees who engaged in unethical selling practices were fired. The managers who designed the systems that produced the behavior were not, at least not until much later, after the scandal went public.

High-level managers at Wells Fargo set extremely ambitious performance goals that called for significant annual growth in the number of products sold to each customer, or "cross-selling."

Wells Fargo's (now former) CEO John Stumpf expected employees to sell eight products per customer, even though the industry average was only two to three. It wasn't realistic, and the goal was apparently chosen in part because "eight" rhymed with "great!"

As for Mill's harm principle, the first question in trying to arrive at a business decision might be, does this action harm others? If the answer is yes, we must make a utilitarian calculation to decide whether there is still a greater good for the greatest number. Then we must ask, who are the others we must consider? All stakeholders? Only shareholders?

What does harm entail, and who decides whether a proposed action might be harmful? This was the reason science and debate were so important to Mill, because the determination could not be left to public opinion or intuition. That was how tyranny started. By introducing deliberation, Mill was able to balance utility with freedom, which was a necessary condition for utility.

Aside from the question of fact--I share Adam Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good"--this argument must be rejected on the grounds of principle.

What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures. In a free society, it is hard for "evil" people to do "evil," especially since one man's good is another's evil.

We also found that it is the middle managers who innovate ways for their subordinates to perform unethically and who pressure them to do so (including by shaming them for low performance).

What's more, we learned that most employees are indeed aware that their behavior is unethical, and that they are also very uncomfortable with complying—though they also may not see a way out, short of leaving the organization. That's not an appealing option if better paying jobs are unavailable. Therefore many employees often reluctantly stay and comply.

This question whether ethics is universal is distinctly Kantian, because Kant believed that not only must a moral agent act with others' interests in mind and have the right intentions, but also that the action be universally applicable. Think of how Kantian ethics might be applied not just on an individual level but throughout an organization, and then society. Kant would judge a corporate act to be ethical if it benefitted others at the same time it benefitted company leadership and stockholders, and if it did not place their interests above those of other stakeholders. If loyalty to a coworker conflicted with loyalty to a supervisor or the organization, for instance, then acts resulting from such loyalty might not meet the conditions of deontology. Either the supervisor or the company would be treated as a means rather than an end. Although the qualitative or humanizing element of Kantian ethics has broad appeal, it runs into limitations in an actual business setting.

Whether the limitations have good or bad effects depends on the organization's culture and leadership. In general, however, most companies do not adhere to strict Kantian theories, because they look to the outcome of their decisions rather than focusing on motives or intentions.

On Sept. 13, 1970, economist Milton Friedman suggested that, as the headline to his essay in The New York Times Magazine put it, "The Social Responsibility of Business Is to Increase Its Profits."

While we hear from many executives about additional social responsibilities, all too often those executives will revert back to arguing, "...but our first social responsibility is to maximize shareholder profits." Businesses that want to be successful in the 21st century need to be saying and doing something else.

In return, global corporations will have sustainable business models that look beyond short-term growth forecasts. They will have a method of operating and a framework for thinking about sustained growth with stakeholders and as stakeholders. Ethical stakeholder relationships systematically grow wealth and opportunity in dynamic fashion.

Without them, the global consumer economy may fail. On an alternate and ethical path of prosperity, today's supplier is a consumer in the next generation and Earth is still inhabitable after many generations of dynamic change and continued global growth.

Or suppose one group of financial advisors has a long track record of giving back to the community of which it is part. It donates to charitable organizations in local neighborhoods, and its members volunteer service hours toward worthy projects in town.

Would this group not strike you as the one worthy of your investments? That it appears to be committed to building up the local community might be enough to persuade you to give it your business. This is exactly how a long-term investment in community goodwill can produce a long pipeline of potential clients and customers.

You can test the validity of this claim yourself. When you choose a company with which to do business, what factors influence your choice? Let us say you are looking for a financial advisor for your investments and retirement planning, and you have found several candidates whose credentials, experience, and fees are approximately the same.

Yet one of these firms stands above the others because it has a reputation, which you discover is well earned, for telling clients the truth and recommending investments that seemed centered on the clients' benefit and not on potential profit for the firm. Wouldn't this be the one you would trust with your investments?

Many people confuse legal and ethical compliance. They are, however, totally different and call for different standards of behavior. The concepts are not interchangeable in any sense of the word. The law is needed to establish and maintain a functioning society. Without it, our society would be in chaos. Compliance with these legal standards is strictly mandatory: If we violate these standards, we are subject to punishment as established by the law. Therefore, compliance in terms of business ethics generally refers to the extent to which a company conducts its business operations in accordance with applicable regulations, statutes, and laws.

Yet this represents only a baseline minimum. Ethical observance builds on this baseline and reveals the principles of an individual business leader or a specific organization. Ethical acts are generally considered voluntary and personal—often based on our perception of or stand on right and wrong.

The problem with this approach is that justice theory is a radical, egalitarian form of liberalism in which redistribution of material goods and services occurs without regard for historical context or the presumption many share that it inherently is wrong to take the property legally acquired by one and distribute it to another. Rawls has been criticized for promoting the same kind of coercion that can exist in utilitarianism but on the basis of justice rather than pleasure. Justice on a societal level would guarantee housing, education, medical treatment, food, and the basic necessities of life for everyone.

Yet, as recent political campaigns have shown, the question of who will pay for these guaranteed goods and services through taxes is a contentious one. These are not merely fiscal and political issues; they are philosophical ones requiring us to answer questions of logic and, especially in the case of justice theory, fairness. And, naturally, we must ask, what is fair?

Whenever you think about the behavior you expect of yourself in your personal life and as a professional, you are engaging in a philosophical dialogue with yourself to establish the standards of behavior you choose to uphold, that is, your ethics.

You may decide you should always tell the truth to family, friends, customers, clients, and shareholders, and if that is not possible, you should have very good reasons why you cannot. You may also choose never to defraud or mislead your business partners. You may decide, as well, that while you are pursuing profit in your business, you will not require that all the money on the table come your way. Instead, there might be some to go around to those who are important because they are affected one way or another by your business. These are your stakeholders.

Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of Government's having the responsibility to impose taxes and determine expenditures for such "social" purposes as controlling pollution or training the hard-core unemployed,

but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.

How to Avoid Becoming the Next Wells Fargo

by Linda TreviÑo & Niki A. Den Nieuwenboer

The Social Responsibility of Business is to Increase its Profits

by Milton Friedman

The Social Responsibility of Business Is to Create Value for Stakeholders

by R. Edward Freeman and Heather Elms

If Wells Fargo would have done this, the unethical behavior could have been

corrected sooner, fewer customers would have been harmed, and the company's reputation would not now be in shambles.

Brys and

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