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The Role of Philosophy & Ethics in Business

Miles ArnoneManaging Director, American Capital Strategies

September 1, 2010

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Overview Outsourcing and Consumer Behavior will be

used to motivate the discussion and provide context.From this we will be able to more easily

conceptualize and discuss the more abstract concepts associated with ethics and philosophy and their relevance to your career.

Who is Miles Arnone?

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What makes a great engagement ring?

Setting

Size (carats)

Cut

Clarity

Color

Why are engagement rings purchased ?

Most goods are acquired basedupon their apparent characteristics.

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Are all diamonds created equal?

Hundreds of millions of $ of diamonds are mined at gunpoint in Sierra Leone, Angola, Liberia, DRC (Congo) each year.

Al Qaeda trades in “conflict diamonds”.

USA consumes 65% of all diamonds including these.

Amputations, rape, murder are routinely committed by the rebel forces controlling the mining regions.

Would you buy a diamond if you knew it cost someone both hands?

Latent characteristics matter!

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What makes a great barrel of oil?

Price

Purity

Delivery

Most goods are acquired basedupon their apparent characteristics.

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Is all oil created equal?

Latent characteristics matter!

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Products and services are increasingly undifferentiated as relates their apparent characteristics. This is a well established cycle for any and all

offerings. The diamond example is not an isolated one. For most

people, the operating assumption is that the government or some other, unnamed power or influence, ensures that only goods and services produced in a “reasonable” manner make their way to us. Is this a good assumption? Oil Natural Gas Coffee Clothing Forest products FurnitureThink of the range of factories and working conditions

you’ve seen in your career.

Latent characteristics of a product are relevant

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Questions, questions, and more questions…. Should the environment (socio-political, economic, specific

company characteristics) in which a product is produced be a relevant consideration when acquiring a good or service, either for direct consumption or for sale to others? Working assumption: Yes This starts us down a very slippery slope…..

What should one measure? What is the appropriate level of granularity when making such

evaluations? What is the relevant standard in evaluating the measurement?

The answers to these questions ultimately presume a philosophical basis, which in turn mandates a certain standard of “moral behavior”. This can be explicit or implicit

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There are several large elephants in the room with us…..

Managers often object to this developing line of thought , namely the idea that there may be a moral or ethical imperative that should impact sourcing decisions.

Five typical Objections are….1. “My job is to maximize profits. My Board of

Directors will accept nothing less.”2. “I don’t have time for philosophical mumbo-jumbo.

That’s all very nice and theoretical, but I’ve got payroll to make.”

3. “If I don’t do it (e.g. make loans to people I doubt can pay) someone else will and then where will my company be?”

4. My impact on what goes on in the world is very limited; this is something for governments to worry about. What I do doesn’t move the needle so why sweat it?

5. This sounds like a prelude to “Buy American” jingoism.

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Roadmap The thesis:

Business decisions should be guided by an explicit standard of ethical behavior as dictated by the philosophical tenets adopted by the firm.● The profit motive is not such a guide in and of itself.● Failure to do so can have dire consequences for the

firm, its shareholders, and the individuals working there.

The manner in which firms handle outsourcing will be used as the context (i.e. an example) in which we will review this thesis.

Our process for this meeting:1. Motivate the discussion - done2. Address common objections3. Suggest a practical approach to outsourcing (and more

generally).

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Objection #1

“My job is to maximize profits. My Board of Directors will accept nothing less.” Implicit assumption #1: Maximizing profits and acting

in accord with one’s philosophical beliefs is not possible.

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A Few Definitions A philosophy is a comprehensive system of ideas about human

nature and the nature of the reality we live in. It is a guide for living, because the issues it addresses are basic and pervasive, determining the course we take in life and how we treat other people.

● The topics that philosophy addresses fall into several distinct fields. Among those of fundamental concern are:

Metaphysics (the theory of reality) Epistemology (the theory of knowledge) Ethics (the theory of moral values) Politics (the theory of legal rights and government) Aesthetics (the theory of the nature of art)

EVERYONE OPERATES ACCORDING TO A PHILOSOPHY, WHETHER EXPLICIT OR IMPLICIT. IT SUBSUMES EVERYTHING ONE DOES AND HOW ONE DOES IT.

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Objection #1

“My job is to maximize profits. My Board of Directors will accept nothing less.” Implicit assumption #1: Maximizing profits and acting in accord with one’s

philosophical beliefs is not possible.● This may or may not be true. It is philosophically dependant.● If one’s philosophy does not allow one to earn money while otherwise being

ethical, time for a new job! Implicit assumption #2: “The end justifies the means”

● The problem here is that ends are not repeatable, only methods or processes are. Further, ultimately, it is the process, or “means” that characterize the individual/company/society, not the “ends”.

► Example – Government subsidization of home ownership● Machiavelli was wrong! Successful ends are derived from appropriate “means”

not vice versa.

Have you ever explicitly discussed this (i.e. the context in which profits are to be gained) with your Board of Directors?

● Maybe not. Sounds too mushy.

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Objection #2

“I don’t have time for philosophical mumbo-jumbo. That’s all very nice and theoretical, but I’ve got payroll to make.” Philosophy is anything but theoretical. Every decision you make

is driven by your philosophy● What you think is the nature of reality (metaphysics)

► E.g. – the world is flat vs. round► Other examples?

● How you know what you know (epistemology)► The role of reason in decision making

● What is “right” and “wrong” (ethics)● Systems of economics and politics

The only question is whether your philosophy is explicit in your own mind or implicit, fuzzy, unable to be articulated.

By way of comparison, “The absence of a decision is a decision”

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Objection #2: Example – Health Care

Philosophical Principle: Health care is an intrinsic human right Implications:

● Resources must be redistributed from those who have to provide healthcare to those who cannot afford it.

● Regulation of health care markets increases.● The state backstops healthcare for those who cannot afford it through

vouchering or direct provision. Results:

● Quality of healthcare declines► Rationing of health care likely

● Availability of healthcare increases► More people have access to lower quality health care than today.► No discrimination based on patient’s genes or lifestyle.

● Profitability of medical businesses declines.► Innovation likely to decrease.

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Objection #2: Example – Health Care Philosophical Principle: Health Care should be managed by the free market. It is not

a right. Implications:

● Individuals are responsible for their own health.● Tort reform required.● Insurance companies must be allowed to compete across state lines● Catastrophic-only health insurance allowed● Government mandates for coverage eliminated● Tax deductions allowed for contributions to provide coverage for those that don’t have.

Results:● Quality of healthcare stable to improved

► No rationing of services.► There will be people who cannot afford healthcare

● Availability of healthcare increases► But each individual is responsible for their own care.

● Price discrimination based on patient’s genes or lifestyle allowed● Cost of insurance likely to vary widely from one patient to the next.● Profitability of medical businesses increases. Red tape declines.

► Innovation likely to increase.

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Objection #3

“If I don’t do it (e.g. lend mortgages to people with limited ability to pay) someone else will and then where will my company be?” Individuals are responsible for their own decisions

and actions. Subjugating one’s decision making to the State, the mob, your peers, common practice, etc. doesn’t alleviate one of responsibility for one’s actions.● Example – Taking office supplies home from work,

accessing Facebook, YouTube, etc. at work.● Example – the Holocaust

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Objection #4

My impact on what goes on in the world is very limited; this is something for governments to worry about. What I do doesn’t move the needle so why sweat it? How we spend our $ goes a long way to shape the world.

We vote with our $ everyday to support various socio-political systems, to promote specific corporate cultures, and to retard the advance of others. It is vitally important, and potentially of greater impact than specific government actions (short of the use of explicit force) in shaping the world.● Ex.: Taiwan and China● As business leaders you play a major role in shaping the

world around you.► IMPACT ~ Total Spend………every year!

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So, what can we say so far…. Undertaking business consistent with one’s philosophical beliefs and

moral standards is appropriate and efficacious. It need not be at odds with strong pursuit of the profit motive over

the long-run. It will undoubtedly not allow the maximization of near-term profits

● Why? Business decisions should be guided by an explicit standard of ethical

behavior as dictated by the philosophical tenets adopted by the firm. This may sound like “motherhood and apple pie”, but in reality most

firms ignore almost all considerations other than straight product price and commercial terms when sourcing. AVOID “hear no evil, see no evil, speak no evil” AVOID “we may think of it as stealing, but they don’t so….” AVOID “there is no black and white, only grey.” This is a shameless

cop-out.

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What are the practical aspects….

1. Explicitly state the Company’s philosophical tenets Who should establish these? What is management’s obligation in shaping/responding to

these beliefs? This is a significant piece of work

2. Seek to work with individuals, firms, nations that are in concert with these beliefs. Heirarchy (concrete information to be favored over abstract):

1. Individuals/business leaders - best2. Companies - good3. Countries – fair to poor

As knowledgeable, world-wise business leaders, you should rarely have to revert to highly abstract information about a country or culture to affect an appropriate policy. The average consumer is not so lucky.

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What are the practical aspects (continued)….

3. Consistently apply the Company’s beliefs across all business interactions Choose partners accordingly – seek a meeting of the

minds (the anti-”at arms length transaction”) Work to have your standards applied

Health and safety Treatment of workers Environment What does this imply as relates wages?

Don’t underestimate the scope of the firm’s influence It is the responsibility of management to know the

conditions under which the products and services that the firm buys are produced.

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CONCLUSIONThe world is changing fast. It’s easy to worry about whether the changes we are

seeing (the rise of China, the exodus of manufacturing jobs from the USA, the tumult in the Middle East, etc., etc.) are going to lead to a better or worse world for our children or our children’s children.

To the extent that we pursue commerce in a manner consistent with our values as a whole we can go a long way to making the world a better place.

Commerce is the primary basis by which value systems compete and are ultimately adopted more broadly or discarded. The extent to which the players on the field explicitly understand, consistently communicate and holistically apply their philosophy largely dictates which will ultimately prevail. The adoption of one or another philosophy on a global scale is not a fait a compli, but rather a function of the philosophies’ concordance with reality and its consistent application by its proponents.

“Know yourself, be consistent and know your partners.”