Stages of Ethical Consciousness
Ever wonder how ethical your business and business decisions are? In the EBBF publication “Ethics and Entrepreneurship: An Oxymoron?” which is included in the Responsible Entrepreneurship Anthology, George Starcher presents a model representing the stages of ethical consciousness an individual or business might have. (Those familiar with Lawrence Kohlberg’s theory of moral development will notice a resemblance.)
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Stage 1: “Might Makes Right”. Decisions and actions in this first and lowest stage of ethical consciousness are based on very simple physical and material power. It is a very Darwinian existence in which “might makes right”, “survival of the fittest”, and the “law of the jungle” prevail. Activities of the Mafia and the oligarchs such as extortion and price-fixing enforced by physical threats could be considered to be Stage 1 behaviour.
Stage 2: “Anything Goes”. Actions in this stage are still very self-centered and materialistic. Entrepreneurs in this stage seek to maximize personal financial gain or simply survive in difficult situation by doing anything that produces a profit as long as they do not get caught. Producing, distributing, and selling drugs or pornography would fall in this level, as would practices such as false representation of products, bribes to government officials, stealing, not paying taxes, false declarations for customs, and failure to respect written or oral commitments. In this stage actions are taken with little or no consideration for other people or parties. This stage is characterized by such expressions as “let’s make a deal”, “nice guys finish last”, “we have to pay bribes”, and “anything goes as long as one does not get caught”, and “we have to lie and cheat for the next five years, and then we will be honest.”
Stage 3: “Maximize profits short-term”. This stage involves greater conformity to socially and generally accepted business practices. Entrepreneurs seek to maximize profits within the constraints of the law. “Whatever is good business is good ethics”, “follow the leading crowd”, and “that’s the way business is done here” best describes the reasoning of entrepreneurs and business people operating on this level. Short-term growth in sales and profits are the primary performance measures. They are reassured by some leading economists such as Milton Friedman who say that the basic responsibility of business to society is to make profits for themselves and their stockholders. The father of capitalism, Adam Smith, described the free enterprise system in The Wealth of Nations, published in 1776. He argued that the interests of society are best served by permitting each person to follow his or her own self-interest in economic life. We sometimes forget though that Adam Smith was himself a priest and that moral behaviour and the rule of law were already accepted bases for society when he wrote about capitalism.
Stage 4: “Maximize profits – long term”. A significantly higher level of ethical consciousness is the school of thought that “sound ethics is good business in the long run.” Entrepreneurs look to rules, laws and codes for guidance. Companies like Shell, whose Managing Director in Bulgaria spoke at a conference in Sofia describing why his company in Bulgaria (and in other countries) refused to pay bribes to contractors to complete new stations on time, exemplify this level of behaviour. While the interests of shareholders remains uppermost in the minds of executives, there is equal if not greater concern for doing what is right and what will prove most profitable over the longer term even if other actions might produce greater short-term profits. An increasing number of companies in Western Europe and the United States have codes of ethics which define what they consider to be ethical behavior. Some companies go so far as to appoint an “ethics officer”, provide training courses on the ethics code, and build respect of this code into the annual performance evaluations.
Stage 5: “The Stakeholder Concept”. Reasoning in this stage goes beyond the notion that the purpose of business is essentially to make profits. Companies openly profess to have a social as well as economic mission. Their behavior is influenced by certain universal principles such as justice as well as by legal codes. Profit sharing, community service projects, and philanthropy are examples. There is increasing recognition in the West of the interdependence of various “stakeholders” in the business. By stakeholder is meant any group or individual who can affect or be affected by the achievement of the organization’s objectives. Examples of stakeholder groups beyond stockholders and owners include: employees, customers, suppliers, banks and other creditors, partners whether local or foreign, governments, and communities in which the company operates. A large number of academics have been writing about this “stakeholder concept” for many years, and increasing attention is being given to it by progressive business leaders. The driving assumption of this concept is service to all stakeholders in the business and balancing their respective interests to seek the greatest good for all. The focus is on building and maintaining mutually enabling relationships, which in turn create value for others and thus justify profit. The measures of success are different as well: quality, service, customer satisfaction, community health, team welfare, employee self-realization. These goals are considered important as well as financial results. Some companies have gone so far as to publish regular annual social reports similar to their annual financial reports.
Stage 6: “Corporate Citizenship”. A yet higher level of ethical consciousness involves redefining the mission of business in society. There are a number of associations and networks of business leaders and academics among the principal proponents of this higher level of ethical consciousness. This “social responsibility” school of thought, present in Stage 5 but to a lesser degree, maintains that business has a major responsibility to contribute to the necessary transformation of what they consider to be a very unhealthy society today. Their belief is based on the premise that a business can be healthy only if society around it is healthy and that no other institution in society, including governments and churches, has the resources or the credibility to bring about this transformation. Entrepreneurs operating on this level seek to achieve certain societal objectives such as community health, job creation, employment of handicapped people, and self realization of employees as well as financial success. The growing importance of networks of “social venture entrepreneurs” illustrates how socially desirable objectives can motivate one as well as profits.
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