CHAPTER TWENTY-SIX

The Ethics of Responsibility

COUNTLESS SERMONS HAVE BEEN preached and printed on the ethics of business or the ethics of business people. Most have nothing to do with business and little to do with ethics.

One main topic is plain, everyday honesty. People in business, we are told solemnly, should not cheat, steal, lie, bribe, or take bribes. But nor should anyone else. Men and women do not acquire exemption from ordinary rules of personal behavior because of their work or job. Nor, however, do they cease to be human beings when appointed vice-president, city manager, or college dean. And there has always been a number of people who cheat, steal, lie, bribe, or take bribes. The problem is one of moral values and moral education, of the individual, of the family, of the school. But there neither is a separate ethics for business, nor is one needed.

All that is needed is to mete out stiff punishments to those—whether business executive or others—who yield to temptation. In England a magistrate still tends to hand down a harsher punishment in a drunken-driving case if the accused has gone to one of the well-known public schools or to Oxford or Cambridge. And the conviction still rates a headline in the evening paper: “Eton graduate convicted of drunken driving.” No one expects an Eton education to produce temperance leaders. But it is still a badge of distinction, if not of privilege. And not to treat a wearer of such a badge more harshly than an ordinary working person who has had one too many would offend the community’s sense of justice. But no one considers this a problem of the “ethics of the Eton graduate,”

The other common theme in the discussion of ethics in business has nothing to do with ethics.

Such things as the employment of call girls to entertain customers are not matters of ethics but matters of esthetics. “Do I want to see a pimp when I look at myself in the mirror while shaving?” is the real question.

It would indeed be nice to have fastidious leaders. Alas, fastidiousness has never been prevalent among leadership groups, whether kings or counts, priests or generals, or even “intellectuals” such as the painters and humanists of the Renaissance, or the “literati” of the Chinese tradition. All a fastidious person can do is withdraw personally from activities that violate his or her self-respect and sense of taste.

Lately these old sermon topics have been joined, especially in the U.S., by a third one: managers, we are told, have an “ethical responsibility” to take an active and constructive role in their community, to serve community causes, give of their time to community activities, and so on.

There are many countries where such community activity does not fit the traditional mores; Japan and France would be examples. But where the community has a tradition of “volunteerism”—that is, especially the U.S.—managers should indeed be encouraged to participate and to take responsible leadership in community affairs and community organizations. Such activities should, however, never be forced on them nor should they be appraised, rewarded, or promoted according to their participation in voluntary activities. Ordering or pressuring managers into such work is abuse of organizational power and illegitimate.

An exception might be made for managers in businesses where the community activities are really part of their obligation to the business. The local managers of the telephone company, for instance, who take part in community activities, do so as part of their managerial duties and as the local public-relations representatives of their company. The same is true of the manager of a local Sears Roebuck store. And the local realtors who belong to a dozen different community activities and eat lunch every day with a different “service club” know perfectly well that they are not serving the community but promoting their own business and hunting for prospective customers.

But, while desirable, community participation of managers has nothing to do with ethics, and not much to do with responsibility. It is the contribution of an individual in his or her capacity as a neighbor and citizen. And it is something that lies outside their job and outside their managerial responsibility.

Leadership Groups but Not Leaders

A problem of ethics that is peculiar to the manager arises from the fact that the managers of institutions are collectively the leadership groups of the society of organizations. But individually a manager is just another fellow employee.

This is clearly recognized by the public. Even the most powerful head of the largest corporation is unknown to the public. Indeed most of the company’s employees barely know his name and would not recognize his face. He may owe his position entirely to personal merit and proven performance. But he owes his authority and standing entirely to his institution. Everybody knows GE, the Telephone Company, Mitsubishi, Siemens, and Unilever. But who heads these great corporations—or for that matter, the University of California, the École Polytechnique or Guy’s Hospital in London—is of direct interest and concern primarily to the management group within these institutions.

It is therefore inappropriate to speak of managers as leaders. They are “members of the leadership group.” The group, however, does occupy a position of visibility, of prominence, and of authority. It therefore has responsibility.

But what are the responsibilities, what are the ethics of the individual manager, as a member of the leadership group?

Essentially being a member of a leadership group is what traditionally has been meant by the term “professional.” Membership in such a group confers status, position, prominence, and authority. It also confers duties. To expect every manager to be a leader is futile. There are, in a developed society, thousands, if not millions, of managers—and leadership is always the rare exception and confined to a very few individuals. But as a member of a leadership group a manager stands under the demands of professional ethics—the demands of an ethic of responsibility.

Primum Non Nocere

The first responsibility of a professional was spelled out clearly, 2,500 years ago, in the Hippocratic oath of the Greek physician: primum non nocere—“Above all, not knowingly to do harm.”

Professionals, whether doctor, lawyer, or manager, cannot promise to do good for a client. All they can do is try. But they can promise that they will not knowingly do harm. And the client, in turn, must be able to trust that the professional will not knowingly do him harm. Otherwise the client cannot trust the professional at all. Professionals have to have autonomy. They cannot be controlled, supervised, or directed by the client. The professional has to be private in that his or her knowledge and judgment have to be entrusted with the decision. But it is the foundation of this autonomy, and indeed its rationale, that the professional sees himself as “affected with the public interest.” Professionals, in other words, are private in the sense that they are autonomous and not subject to political or ideological control. But they are public in the sense that the welfare of their clients sets limits to their deeds and words. And Primum non nocere, “not knowingly to do harm,” is the basic rule of professional ethics, the basic rule of an ethics of public responsibility.

There are important areas where managers, and especially business managers, still do not realize that in order to be permitted to remain autonomous and private they have to impose on themselves the responsibility of the professional ethic. They still have to learn that it is their job to scrutinize their deeds, words, and behavior to make sure that they do not knowingly do harm.

Managers who fail to think through and work for the appropriate solution to an impact of their business because it makes them “unpopular in the club” knowingly do harm. They knowingly abet a cancerous growth. That this is stupid has been said. That this always in the end hurts the business or the industry more than a little temporary “unpleasantness” would have hurt has been said too. But it is also gross violation of professional ethics.

But there are other areas as well. American managers, in particular, tend to violate the rule not knowingly and do harm with respect to:

• executive compensation;
• the use of benefit plans to impose “golden fetters” on people in the company’s employ; and
• in their profit rhetoric.

Their actions and their words in these areas tend to cause social disruption. They tend to conceal healthy reality and to create disease, or at least social hypochondria. They tend to misdirect and to prevent understanding. And this is grievous social harm.

Executive Compensation and Economic Inequality

Contrary to widespread belief, incomes have become far more equal in all developed countries than in any society of which we have a record. And they have tended to become steadily more equal as national and personal incomes increase. And, equally contrary to popular rhetoric, income equality is greatest in the United States. No only is the distance between net after-tax income of the top earners, e.g., the managers in a business, and both the average and the bottom incomes smaller in the U.S. than in any other developed country—let alone than in any developing country. The proportion of income recipients in extreme income brackets at top and bottom is far smaller compared to the middle income group.

The most reliable measure of income equality is the so-called Gini coefficient in which an index of zero stands for complete equality of income and an index of 1 for total inequality in which one person in the population receives all the income. The lower the Gini co-efficient, the closer a society is to income equality. In the U.S. the Gini in the early 1970s stood around 0.35—with about the same figure in Canada, Australia, and Great Britain, and probably also in Japan. West Germany and the Netherlands are about 0.40. France and Sweden are around 0.50.

Specifically, in the typical American business the inequality of income between the lowest-paid people and the people in charge—that is, between the machine operator and the manager of a large plant—is at most one to four, if taxes are taken into account. The take-home pay of the machine operator after taxes in 1975 was around $8,000 a year; the after-tax income of very few plant managers was larger than $28,000, all bonuses included. If fringe benefits are included, the ratio is even lower, i.e., one to three (or $14,000 to $38,000 maximum). And similar ratios prevail in other developed countries, e.g., Japan. This, it should be said, is far greater income equality than in any communist country for the simple reason that the economic level of a communist country is lower.

In Soviet Russia, where there are practically no income taxes, the income differential between industrial worker and plant manager runs around 1 to 7, without taking into account the noncash benefits of the Russian manager. And Russian managers operate at an extreme of profit maximization; their profit-based bonus system of compensation so directs them. In China, the differential between workers and plant managers seems to run around 1 to 6 or so.

Whether the degree of inequality of incomes that actually prevails in the U.S. economy is “too high” or “too low” is a matter of opinion. But clearly it is much lower than the great majority of the American public accepts or even considers desirable. Every survey shows that an “income ratio of 1 to 10 or 12” between the blue-collar worker in the factory and the “big boss” would be considered “about right.” That would make the “after-tax take-home pay” of the “big boss” somewhere around $75,000 to $100,000 a year, which would be equal to a pre-tax salary of at least $200,000. And only a mere handful of executives earn that much, bonuses included. If the comparison is made—as it should be—between total incomes including fringes, deferred compensation, stock options, and all other forms of extra compensation, a 1 to 12 ratio would work out to an after-tax top figure of $150,000. And no more than a dozen or so top executives in the very largest companies have a pre-tax “total compensation package” of $300,000 and up, which is needed to produce an after-tax value of $150,000. The “extremely rich” are not employed executives—the tax system takes care of those (as it should); they are either a few heirs of the millionaires of pre-tax days or owners of small businesses.

And relative to the incomes of manual and clerical workers, after-tax executive compensation, and especially the income of the executives at the very top, has been going down steadily for fifty years or more.

The facts of increasing income equality in U.S. society are quite clear. Yet the popular impression is one of rapidly increasing inequality. This is illusion; but it is a dangerous illusion. It corrodes. It destroys mutual trust between groups that have to live together. It can only lead to political measures which, while doing no one any good, can seriously harm society, economy, and the manager as well.

In some considerable measure, the belief in growing income inequality in the U.S. reflects, of course, America’s racial problem. The emergence into visibility, that is, into the big cities, of a disenfranchised nonworking population of Blacks has created a marginal but highly visible group suffering from extreme inequality of incomes. That the income of the employed Negro has been going up rapidly and is likely, within a decade or so, to be equal to that of the employed white doing the same kind of work—and that four-fifths of the American Negroes are employed and working—tends to be obscured by the dire poverty of the much smaller but highly concentrated groups of unemployed or unemployables in the Black ghettos of the core cities.

Another reason for the widespread belief in growing inequality is inflation. Inflation is a corrosive social poison precisely because it makes people look for a villain. The economists’ explanation that no one benefits by inflation, that is, that no one gets the purchasing power that inflation takes away from the income recipients, simply makes no sense to ordinary experience. Somebody must have benefited, somebody “must have stolen what is rightfully mine.” Every inflation in history has therefore created class hatred, mutual distrust, and beliefs that, somehow, “the other fellow” gains illicitly at “my” expense. It is always the middle class which becomes paranoid in an inflationary period and turns against the “system.” The inflations of the sixties in the developed countries were no exceptions.

But the main cause of the dangerous delusion of increasing inequality of income is the widely publicized enormous pre-tax incomes of a few people at the top of a few giant corporations, and the—equally widely publicized—“extras” of executive compensation, e.g., stock options.

The $500,000 a year which the chief executive of one of the giant corporations is being paid is largely “make believe money.” Its function is status rather than income. Most of it, whatever tax loopholes the lawyers might find, is immediately taxed away. And the “extras” are simply attempts to put a part of the executive’s income into a somewhat lower tax bracket. Economically, in other words, neither serves much purpose. But socially and psychologically they “knowingly do harm.” They cannot be defended.

One way to eliminate the offense is for companies to commit themselves to a maximum range of after-tax compensation. The 1 to 10 ratio that the great majority of Americans would consider perfectly acceptable, would, in fact, be wider than the actual range of most companies. (There should, I would argue, be room, however, for an occasional exception; the rare, “once-in-a-lifetime,” very big, “special bonus” to someone, a research scientist, a manager, or a salesperson, who has made an extraordinary contribution.)

But equally important is the acceptance of social responsibility on the part of managers to work for a rational system of taxation, which eliminates the temptation of “tax gimmicks” and the need for them. We know the specifications of such a system—and they are simple: no preferential tax rates for any personal income, whether from salaries or from capital gains, and a limit on the maximum tax—say 50 percent of total income received.

There is a strong case for adequate incentives for performing executives. And compensation in money is far preferable to hidden compensation such as perquisites. The recipient can choose what to spend the money on rather than, as in the case of “perks,” taking whatever the company provides, be it a chauffeur-driven car, a big house, or (as in the case of some Swedish companies) a governess for the children. Indeed it may well be that the compression of income differentials in the years since 1950 has been socially and economically detrimental.

What is pernicious, however, is the delusion of inequality. The basic cause is the tax laws. But the managers’ willingness to accept, and indeed to play along with, an antisocial tax structure is a major contributory cause. And unless managers realize that this violates the rule “not knowingly to do damage,” they will, in the end, be the main sufferers.

The Danger of “Golden Fetters”

A second area in which the manager of today does not live up to the commitment of Primum non nocere is closely connected with compensation.

Since World War II compensation and benefits have been increasingly misused to create “golden fetters.”

Retirement benefits, extra compensation, bonuses, and stock options are all forms of compensation. From the point of view of the enterprise—but also from the point of view of the economy—these are “labor costs” no matter how they are labeled. They are treated as such by managements when they sit down to negotiate with the labor union. But increasingly, if only because of the bias of the tax laws, these benefits are being used to tie an employee to his or her employer. They are being made dependent on staying with the same employer, often for many years. And they are structured in such a way that leaving the company’s employ entails drastic penalties and actual loss of benefits that have already been earned and that, in effect, constitute wages relating to past employment.

This may be proper in a society which, like that of Japan, is built on lifetime employment and excludes mobility. Even in Japan, however, “golden fetters” are no longer acceptable to professional and technical employees who increasingly should have mobility in their own interest, in that of the Japanese economy, and even in that of the Japanese company. In the West, and especially in the United States, such golden fetters are clearly antisocial.

Golden fetters do not strengthen the company. They lead to “negative selection.” People who know that they are not performing in their present employment—that is, people who are clearly in the wrong place—will often not move but stay where they know they do not properly belong. But if they stay because the penalty for leaving is too great, they resist and resent it. They know that they have been bribed and were too weak to say no. They are likely to be sullen, resentful, and bitter the rest of their working lives.

The fact that the employees themselves eagerly seek these benefits is no excuse. After all, medieval serfdom also began as an eagerly sought “employee benefit.”

It is incumbent, therefore, on the managers to think through which of these benefits should properly—by their own rationale—be tied to continued employment. Stock options might, for instance, belong here. But pension rights, performance bonuses, participation in profits, and so on, have been “earned” and should be available to employees without restricting their rights as a citizen, an individual, and a person. And, again, managers will have to work to get the tax law changes that are needed.

The Rhetoric of the Profit Motive

Managers, finally, through their rhetoric, make it impossible for the public to understand economic reality. This violates the requirement that managers, being leaders, not knowingly do harm. This is particularly true of the United States but also of Western Europe. For in the West, managers still talk constantly of the profit motive. And they still define the goal of their business as profit maximization. They do not stress the objective function of profit. They do not talk of risks—or very rarely. They do not stress the need for capital. They almost never even mention the cost of capital, let alone that a business has to produce enough profit to obtain the capital it needs at minimum cost.

Managers constantly complain about the hostility to profit. They rarely realize that their own rhetoric is one of the main reasons for this hostility. For indeed in the terms management uses when it talks to the public, there is no possible justification for profit, no explanation for its existence, no function it performs. There is only the profit motive, that is, the desire of some anonymous capitalists—and why that desire should be indulged in by society any more than bigamy, for instance, is never explained. But profitability is a crucial need of economy and society.

Managerial practice in most large American companies is perfectly rational. It is the rhetoric which obscures, and thereby threatens to damage both business and society. To be sure, few American companies work out profitability as a minimum requirement. As a result, most probably underestimate the profitability the company truly requires, let alone the inflationary erosion of capital. But they, consciously or not, base their profit planning on the twin objectives of ensuring access to capital needed and minimizing the cost of capital. In the American context, if only because of the structure of the U.S. capital market, a high “price/earnings ratio” is indeed a key to the minimization of the cost of capital; and “optimization of profits” is therefore a perfectly rational strategy which tends to lower, in the long run, the actual cost of capital.

But this makes it even less justifiable to keep on using the rhetoric of the profit motive. It serves no purpose except to confuse and embitter.

These examples of areas in which managers do not hold themselves to the rule “not knowingly to do harm” are primarily American examples. They apply to some extent to Western Europe. But they hardly apply to Japan. The principle, however, applies in all countries, and in the developing countries as much as in developed ones. These cases are taken from business management. The principle, however, applies to managers of all institutions in the society of organizations.

In any pluralist society responsibility for the public good has been the central problem and issue. The pluralist society of organizations will be no exception. Its leaders represent “special interests,” that is, institutions designed to fulfill a specific and partial need of society. Indeed the leaders of this pluralist society of organizations are the servants of such institutions. At the same time, they are the major leadership group such as society knows or is likely to produce. They have to serve both their own institution and the common good. If the society is to function, let alone if it is to remain a free society, the people we call managers will remain “private” in their institutions. No matter who owns them and how, they will maintain autonomy. But they will also have to be “public” in their ethics.

In this tension between the private functioning of the manager: the necessary autonomy of the manager’s institution and its accountability to its own mission and purpose, and the public character of the manager, lies the specific ethical problem of the society of organizations. Primum non nocere may seem tame compared to the rousing calls for “statesmanship” that abound in today’s manifestos of social responsibility. But, as the physicians found out long ago, it is not an easy rule to live up to. Its very modesty and self-constraint make it the right rule for the ethics managers need, the ethics of responsibility.