Good businesses, great reputations, very bad decisions

The economy is still in a shambles after many of the world’s most prominent firms engaged in financial shenanigans that a sixth grader could see through – so maybe we shouldn’t be surprised by a new study showing that there’s a strong correlation between a corporation’s prominence and its willingness to break the law.

The study is presented in the Academy of Management Journal.  Of the 469 incidents of illegal activity sampled in the study, 382 (81 percent) were committed by firms on Fortune magazine’s “Most Admired Companies” list and were considered “high performing.”

Why?  According to a review of the study “It’s not that poor firms necessarily have more scruples or that prominent, high-performing companies are inherently evil (or that Fortune magazine is playing a cruel joke on its readers), but that management teams at more prominent firms feel more pressure to do something — anything — to increase the bottom line and maintain their preeminent position.”

It is, in other words, the nature of the system:  the more successful a company is, the more it’s pressured to outperform expectations, and that leads to increasing pressure to cut moral corners.

Marvin Brown, a respected business ethicist and member of Saybrook’s Graduate College of Psychology and Humanistic Studies Organizational Systems faculty, says that the very foundation of capitalism as we understand it – going back to Adam Smith – involves turning a blind eye to the ethical questions involved in corporate success.

In  his  forthcoming book Civilizing the Economy (Cambridge University Press) Brown notes that the booming Scottish economy that Smith  enjoyed when he was writing  his seminal economic work The Wealth of Nations was itself largely powered by the slave-based tobacco  trade.  Smith was aware of that trade, and the essential role it played in the success of the Scottish economy – yet nowhere is slavery found in Smith’s story of wealth creation.  Smith may have been against slavery, Brown notes, but he ignored its role in creating wealth. The very first theorist of capitalism, then, was willing to ignore the fact that the most successful firms were also the most exploitative … it simply didn’t figure into his philosophy.

Brown writes:

“If (Smith) had written about this, of course, he would have had to abandon the notion of an invisible hand directing the economy.  It was not the invisible hand that coordinated the production and distribution of tobacco (among other goods), but the whip of the slave driver, the helping hand of the Scottish merchant, and the imperial hand of the British government that protected and maintained a very lucrative Atlantic commerce.  Without the invisible hand, Smith’s whole view of human progress would require a major review. The story he did tell us, in other words, was in large measure a fabrication.”

What Smith’s silence and the Academy of Management Journal study tell us, Brown says, is that we need a new way of talking about the economy – one that takes the moral cost of productivity into account.

“This doesn’t mean throwing out capitalism:  there’s no question that capitalism has been very successful at generating wealth and productivity and innovation, and we don’t want to give up these things,” Brown says.  “But it’s startling how much of economic law is based on property law – some 90 percent – and labor is treated not as coming from people but from property.  This was how Adam Smith could ignore the slave trade … slaves were property … and how so many companies today can ignore the human cost of their actions:  property, not people, is the fundamental concern.”

We didn’t need a survey, after all, to know that often companies freely admit the difference between the bottom line and the right thing to do.  “Eight years ago or so the CEO of Ford said that they want to be socially responsible, and they know that SUVs are not, but they make a lot of money with them, and are going to sell them,” Brown recalls.  From the standpoint of Adam Smith’s capitalism, that was the right decision:  for those of us in the real world, it’s clearly a bad idea.

The first step to a new way of talking about wealth, success, and economics, then, is to stop fooling ourselves:  we don’t have to give up free enterprise to acknowledge that the market is a social and human institution that should be based on civic norms.


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