Businesses are simply a series of contracts. Consider the following example:

Transcription

1 Louis Brotherton

2 Friedman vs. Freeman On September 13 th, 1970 The New York Times Magazine published a story by Nobel Prize winning economist Milton Friedman, titled The Social Responsibility of Business is to Increase Profits. In this article Friedman reasoned that the fiduciary duty of corporate management is to maximize returns for shareholders. Friedman condemned the prevailing rhetoric that chastised self-interest. Friedman s article set the stage for the fierce debate that continues today. Prominent philosophers, ethicists and businessmen countered Friedman s analysis. Thomas Donaldson, in his 1982 book, Corporations and Morality, argued that corporate responsibilities derive from a social contract with society. Two years later, R. Edward Freeman, in Strategic Management: A Stakeholder Approach, revolutionized the language of corporate responsibility by proposing stakeholder theory. Freeman argued that corporate responsibilities extend to stakeholders in businesses, and that successful businesses create value across the spectrum of stakeholders. Corporate social responsibility and the broad definition of parties to whom a corporation is responsible now permeates the vernacular of CEOs. Understanding the moral purpose of business is a question of applied ethics, which uses normative theories as a lens to evaluate real dilemmas. I suggest that we use applied ethics to define the ethical function of business. First, we establish an ethical foundation for analysis; that liberty is ethical, and that liberty validates ethical systems. Based on this commonality, it follows that a system is ethical if it serves an ethical purpose, and promotes ethical outcomes. This paper will demonstrate that the role of business through capitalism is ethical because creating value is an ethical purpose and pursuing shareholder interest produces ethical outcomes. Liberty, a Condition Precedent to Ethics Ethics is the study of how one ought to act. It is about choices. Liberty is the base state for ethical deliberation and action. Removing freedom makes decisions and deliberation impossible and ethics irrelevant. Ethics is about choices and liberty defines choice. Contracts, when entered into freely, are recognitions by parties that they anticipate benefit acting in agreement. Agreements are validated by liberty and the ability to choose to agree, or not. Honoring contracts is ethical, because failing to honor a contract renders the original agreement dishonest, and removes the liberty that ethically legitimized the original agreement. Therefore the execution and fulfillment of contracts is an ethical process. What is a Business? Businesses are simply a series of contracts. Consider the following example: One man owns an axe while another owns a forest. Both men recognize the benefit of interaction and agree to work together, splitting wood and sharing proceeds. A

3 man down the street grows vegetables and is willing to trade vegetables for wood. All parties agree to trade two bushels of wood in exchange for one bag of food. The two men split the bag of food, and everyone has wood and food. This illustrates how businesses operate through agreements. Each agreement is volitional and based on the parties interests. Businesses utilize liberty in pursuit of self-interest. The initial agreement is an agreement among owners to take some risk in expectation of residual benefits. When the owners trade, they enter an agreement with a customer; the customer desires their product and rewards the owners through trade. Over time, growth adds complexity and scale. Contracts with employees, suppliers, the government and investors all have their own terms, however all contracts are predicated on the initial contract; the contract among owners. These contracts are entered freely and it is ethical to honor these contracts. Thus liberty provides the ethical justification for businesses. The Value of Value Proving businesses arise ethically does not prove that businesses serve an ethical purpose. To this end, it must be demonstrated that businesses produce ethical outcomes. All normative ethical theories strive to improve people s lives. By definition, the exercise of liberty through agreements increases utility. Consider again the wood chopping business. Before the business formed, there were un-harvested trees and an unused axe. The business transformed those inputs into items of value. Importantly, the business did this without creating harm and none of the agents interacting were coerced. The elegance of liberty is that it makes people better. Businesses, in a state of freedom, inevitably create value because people have the ability to stop trading. If the farmer stops needing wood, he won t trade and the business must find a new value proposition. Businesses must make things better or liberty will intervene. Businesses facilitate agreements and division of labor. Consider fifteen people stranded in the woods. If each person acted alone to survive, none would. The best hunters might eat and the best carpenters might build shelter, but when night came, everyone would be either hungry or cold. However if they all agree to divide up the work and specialize, everyone will have food and shelter. Hierarchy of Responsibilities As the value businesses provide increases, owners are rewarded. As articulated earlier, companies form through series of ethical agreements. If a company sells a product to a customer the company must perform. If a company hires an employee, the company has an obligation to pay the employee and deliver agreed upon benefits. Businesses have an incentive not to violate these agreements as the justice system provides recourse for breach. Beyond contractual responsibilities, a company s fundamental obligation is to the owners; to do business in pursuit of their interest. Companies are the property of the owners, and those running the company are using the owners resources. To spend in ways inconsistent with the owners interest is dishonest and unethical. When companies provide value, they grow, thus it is in the self-interest of the

4 owners and employees to provide value to customers. The interest of shareholders is to create value and value creation is ethical. Acknowledging that businesses arise ethically and serve an ethical purpose, the analysis shifts to capitalism. Detractors argue that modern capitalism generates unethical behavior; specifically that capitalism breeds inequality and encourages exploitation. The Democracy of Capitalism Businesses adapt or fail. Every exercise of liberty is a validation of a business s purpose. A modern corporation articulates a value proposition through its business plan. Investors endorse the plan and corporations apply owners resources to execute the plan. This system provides equal opportunity but not equal outcomes. Everyone has the freedom to enter agreements and those who enter good agreements are rewarded. This incentivizes people to take risks and work hard. While some reap more benefits than others, the rising tide raises all ships. Through capitalism today s luxuries become tomorrow s commodities. Refrigerators, electric lighting, and indoor plumbing once were the excesses of robber barons; now even impoverished households have television and entertainment systems. Short Term Gains, Long Term Pains The assertion that capitalism incentivizes exploitation rests on the axiom that abuse is consistent with businesses interest. An exploitive business is one that coerces or defrauds, but capitalism does not reward such behaviors. A company may decide to dump waste in a river to save money. While the company saves in the near term, the local community depends on the river. As their employees and customers get sick, the company faces challenges. When the behavior becomes known, the customers stop trading, and the company fails. When companies sacrifice honesty for short term gains, people will stop doing business with them. In all systems, there will always be thieves, but capitalism does not promote thievery. Crooks are not a product of capitalism, but of societal incentives and irrationality. The ethics of capitalism are predicated upon cooperation and integrity. Capitalism creates the incentive to cooperate, and the natural checks and balances of capitalism keep self-interest in check. Companies are rewarded in capitalism for providing long term value, not cheating. Whole-istic View On January 31, 2012 two business tycoons sat in padded chairs facing the audience. Walter Robb, the co-ceo of Whole Foods, sporting jeans and a blazer, embodied the idea of stakeholder theory. To his left, John Allison, the retired CEO of BB&T Corporation, wore business professional attire and confidently articulated Randian philosophy. Unfolding in front of a lucky group of Wake Forest student was a clash of intellectual heavyweights.

5 Throughout the afternoon, Mr. Robb expressed that shareholders, while important, are one interest in a wide spectrum. Despite Mr. Robb s rhetoric, Whole Foods predominantly serves its shareholders. Consider that shareholders are unnecessary for Whole Foods model; it could exist and grow without profit, and sell food for lower prices. Whole Foods value proposition is that they are different. Whole Foods sells corporate social responsibility, and Walter Robb is a great salesman. Mr. Robb is not acting unethically when he creates profit for his shareholders, Whole Foods provides values to customers, and every time a customer spends money at Whole Foods they legitimize the Whole Foods vision. Whole Foods is a great company, not because they consider stakeholders, but because they pursue shareholder interest, and in the process create value for the world.