Talk of transparency, integrity, and environmental concern is comforting. But it is a dangerous distraction from reality.

September 2023

According to Investopedia, business ethics are the “moral principles, policies and values that govern the way businesses and individuals engage in business activity”.

But what are these moral principles, and who defines them? What are they intended to achieve? Over what time? Are these principles for the benefit of society, or business?

As businesses have no inherent interest in what is good for society, other than ensuring there are future customers, ethical business principles can only exist to guide the policies and values of business. But to what end?

The answer is that the moral principles of business will be defined by whatever generates the highest short term financial returns. This is not a value judgement. It is simply the reality of how the current economic system works. As Milton Friedman, the father of modern economics says, the goal of a business is to make the greatest possible short term profit. It is a cast-iron rule, and well-intended ideas about morality do not change that.

Does that mean companies should employ children, outsource to businesses with unsafe working conditions, pollute the environment, pay people as little as possible, or provide safety equipment for workers?

For most people in the rich world the answers to these questions are generally clear. People in the rich world have a broadly similar moral framework, a legacy of Christianity, which informs their thinking. They might struggle to define where the boundaries lie, and they typically ignore the fact that their moral framework keeps changing, because what was often acceptable in the past is not today. Rich-world ideas of morality are not actually based on principles: they are built on trends in thinking.

But what of countries not dominated by rich-world ideas? Should rich world companies force their ethical values on other places? Should they be able to impose their sense of moral superiority, even if it looks suspiciously close to colonialism? Or should other countries ignore the rich world’s ethical ideas? Should rich world firms quietly outsource to businesses that don’t care about high-minded Western ideals, and then appear shocked when they get caught?

Who makes that decision? Is it likely to be the purchasing manager with an MBA in business ethics, or the CEO? Will the decision be driven mostly by someone who thinks he cares about the world, or by someone who is expected to produce higher quarterly returns if they want to keep their job?

Businesses will choose whatever is most profitable because any company which fails to maximise profits will lose market share. A rival that can cut costs by whatever means, such as employing children in risk-riddled factories, has a competitive advantage. In the long run, a less ethical company will beat a higher-minded competitor by growing faster and more profitably.

The principle of profit first, as the only impelling force in business, applies in many other ways. It explains why companies choose to go bust to escape their debts. It explains why companies pollute the environment – it is simply more profitable than respecting nature. It explains why it makes sense to do absolutely anything that boosts profits as long as it is lawful. Highfalutin ideas about business ethics don’t changes that.

This is where the line gets drawn. Businesses do not need to be ethical and nothing within the current system says they should be. All businesses need do is obey the law. Businesses don’t have to care about what is good for the world because, unless they are forced to by law, it simply doesn’t matter to them. Only governments can define the framework in which businesses operate.

This is why climate change can’t be fixed by businesses, even if they want to help. It is simply not profitable for the vast majority of businesses to do anything which reduces the rate of global heating to any useful degree. There are almost no useful market-based solutions to global warming because there is very little profit in doing what’s necessary. There is no profit in closing refineries or cement factories. There is no profit in taking most vehicles off the roads, retiring cruise ships and drastically cutting consumption. There is no money to be made from stopping glaciers melting, forests burning or terrible floods. And there is no such thing as net-zero. Regulatory intervention is the only effective way to stop climate change getting completely out of control.

All this business talk of accountability, integrity, trustworthiness, responsibility, transparency, compassion, fairness and environmental concern is surely comforting. But it is a dangerous distraction from the reality of climate change which makes it harder for societies to do what’s needed.

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Child labour photo from billow926 on unsplash.
Mining picture Johannes Plenio Pexels