The Rational Argumentator

IN TODAY’S COMPETITIVE BUSINESS ENVIRONMENT, a growing number of firms will do almost anything to gain sales and customers, as well as to increase profits.  For some of these firms, playing by the rules doesn’t achieve the results they are after.  Firms have the choice to act ethically or unethically.  While misguided managers think that unethical behavior can lead the firm, and ultimately themselves, to greater profits over the long term, it is only for the short term.  It will eventually lead to their downfall in that unethical behavior spirals out of control and can be very difficult to maintain.  Once this occurs, a firm’s reputation becomes tarnished and the company fades into non-existence.  On the contrary, “firms that pursue ethically driven strategies realize a greater profit potential than those firms who currently use profit-driven strategies” (Arjoon 159).

The point is that a firm’s leaders do have a choice in how they conduct business.  Creating an ethical business does not happen overnight.  It takes extensive collaboration and several implementation and evaluation processes, as well as continual reinforcement of and changes to established practices and values.  Perhaps one of the most important aspects to creating an ethical business is that it requires cooperation on multiple organizational levels and the implementation of virtuous behavior and values.

Maintaining ethical practices, once implemented, is an ongoing process.  There are many factors that can affect ethical behavior, such as competition for customers and market share, the need for increased profits, and management incentives.  Some firms, such as BB&T have been able to implement an ethical environment that has led to firm success, while others such as Enron, have succumbed to greed and wrongdoing, and no longer are in existence.  BB&T’s story of success will be discussed later in this paper.

CREATING AN ETHICALLY DRIVEN BUSINESS

Business ethics can be defined as “the applied ethics discipline that addresses the moral features of commercial activity” (Marcoux).  The question we have to ask concerning business ethics is how they can be applied to a business.  One of the most important aspects in creating an ethical business entails the need for new and refined organizationalvalues.  A value, as defined by Ayn Rand in Younkins’s article, is “that which one acts to gain and/or keep” (Younkins 9). Antonio Argandoña suggests a business must first identify its currently existing values and from that develop what values are needed (Argandoña 22).  In identifying these needed values, it is crucial that businesses select values that pertain to both the business’s goals, as well as the employees’ goals.  Congruence between the goals of the business and its employees increase the chances that the valueswill be received well and adhered to.

Once the desired values and goals have been determined, it falls in the hands of management to implement and communicate them.  “At the top level of an organization, it takes effective communicators who are clear about what they champion and who establish the company on virtuous behavior” (Younkins 21).Virtues, which are also defined by Ayn Rand in Younkin’s article, are “the act[s] by which one gains and/or keeps an objective value” (Younkins 11).  It is crucial for each employee and manager to establish virtues within themselves in order to pursue individual and organizational values, as well as keep them once they have been successfully implemented.It is the responsibility of management to ensure that these values are clearly communicated and followed, while established virtuous behavior becomes the mean by which these values flourish and exist.“A culture (or climate) of virtue in a business begins with executives who exhibit virtuous leadership through their personal actions and interpersonal relationships” (Younkins 21).

In displaying virtuous behavior throughout an organization, managers are setting an example for employees.   “Employees are influenced by observing visible and legitimate role models who themselves act as virtuous agents.  Not only should leaders openly discuss virtues and values, they should also live the virtues and values that they advocate” (Younkins 21).  I believe that this is one of the most important aspects in creating and sustaining an ethical business environment.  As explained by Kouzes and Posner in Minkes, Small, and Chatterjee’s article, “…leaders who could not personally adhere to a firm set of values, could not convince others of the worthiness of those values” (Minkes, Small, and Chatterjee 330).  People learn through example.  Therefore, managers should be mindful of this and back up their words with consistent virtuous behaviors that champion the organization’s values.

Once organizational values have been implemented, only half of the work has been done.  The remaining half is a continual and never ending process within the business.  In maintaining an ethical business, ongoing promotion and reinforcement is necessary.  Management must continue to display ethical behavior, while continuing to communicate values to employees.  This also includes communicating what actions are and are not acceptable.  Employee evaluations should also frequently be performed, in which employees are evaluated on values implemented by the organization’s managers.  In addition, management also needs to develop systems that reward value-oriented behaviors and reprimand value-destructive behaviors.

In regards to a reward system, “employees should be objectively appraised and compensated based on their contribution toward achieving a firm’s mission, values, and goals” (Younkins 19).  Employees may receive monetary or recognition awards for their display of virtuous and ethical behavior.  In establishing such incentives, there is an encouragement that exists among employees to accept and display the organization’s values and goals.  In addition, such incentives create a pathway in which individuals can fulfill their own self-interests and goals simultaneously.  “The good manager tries to shape employees’ ideas about self-interest by instituting incentives rewarding cooperation and reinforcing the pleasure people take in collaborating with each other” (Koehn 498). When employees act ethically, the business is also handsomely rewarded in that it gains a good reputation as being an ethically driven business.  This can lead to higher profits in that consumers will be more likely to choose that particular business over competitors because of its reputation.  “Many companies are now realizing that ethically driven strategies are resulting in a sustainable competitive advantage” (Arjoon 168).  In addition, “companies that have seriously adopted ethically driven or people-centered strategies have seen clear gains in productivity, sales and profits, customer service, retention rates, reduction in absenteeism, positive impact on employee morale, [and] increased and timely launching of products” (Arjoon 169).

Adversely, a disciplinary system is also necessary in order to maintain organization values and ethically driven behavior that have already been established.  Employees should be aware of the possible repercussions of their actions in advance, and management needs to ensure disciplinary actions are followed through with when dealing with value-destructive behaviors.  This sends a message to employees that unethical behavior will not be tolerated and it should be avoided at all costs.

The acts of Enron and WorldCom have increased consumer demands for ethically driven organizations.  Therefore, the businesses that make ethics a priority will likely obtain a sustainable competitive advantage because more consumers will choose to do business with them.  In today’s economy and business world, businesses must place a large focus on ethics in order to be successful.

FACTORS THAT AFFECT ETHICAL BEHAVIOR

Implementing a form of virtue ethics and values throughout a business can be very challenging, but maintaining it can be just as difficult.  There are many factors that can affect ethical behavior and lead a manager or employee to act unethically.  Competition for customers and increased market share, as well as the need for more profit are common issues that can lead to unethical behavior.  In addition, management incentives, such as bonuses, pay increases, promotions, and stock options can open the gateway for unethical behavior.

With a specific focus on profit, businesses that have an urgency to increase profits are likely to engage in false reporting.  Reporting false financial information makes a business’s financial statements look more appealing to investors and gives a false pretense that the business is in better financial health than it really is.  In addition, management may inflate earnings if they receive bonuses, pay increases, or promotions for increasing profits.  These monetary compensations can prove beneficial for businesses in that management will be more driven to make sales and increase wealth in the business.  Adversely, these monetary compensations can be dangerous if a manager works in his or her own interest and does not act ethically.  It could put the business in a financial position that is difficult to correct.

Stock options are another form of management compensation.  “Stock options allow employees to purchase a particular number of common shares of company stock at a specified price over a specified time period” (Brooks and Dunn 172).  Stock options can be beneficial in that they serve as a motivational devise.  When managers have an interest in the company they work for, they are more willing to strive towards an increase in stock prices.  Shareholders, as well as the managers, enjoy higher returns when stock prices increase.  In addition, stock options enable management to adopt the investor’s perspective in that theyenable both the interests of investors and management to be aligned.

One of the biggest problems with this is that unethical managers can work out of their own self-interest to falsely raise stock prices in order to earn more money.  With the incentive to earn more money comes the high possibility for unethical behavior and false reporting.  Managers that get used to these increasing stock prices are also the ones who will likely forego ethical standards and correct reporting procedures.  The concept of stock options can be extremely dangerous to a firm, especially when stock prices are truly in decline and these types of managers are present.  Reporting false income to increase these prices will eventually catch up to the firm and will result in the company’s non-existence.  Another problem with stock options is that management has the option to exercise their stock options and then sell them immediately.  This does not align with investor interests in that managers are only maintaining a short term perspective.  Making decisions based on the short term only hurts the long term investors.

BB&T – A TRUE ETHICALLY DRIVEN BUSINESS

BB&T is a fine example of a business that has been led to success through the values-driven approach adopted by one its leaders.  John Allison, former CEO of BB&T, now serves as the chairman of the board of directors.  During Allison’s time as CEO, the company has grown from approximately $5 billion in assets to $165 billion in assets.  This substantial growth has placed the company as the eighth largest financial institute in the United States.  Just a few of the issues BB&T has made a bold stand on are a municipality’s right to seize property by eminent domain for the purpose of economic development, and negative amortization loans.  Allison received national attention is his decision to “not provide loans for any economic development projects in which the land for the project had been taken in this manner” (Parnell and Dent 587).  This decision was not initially favored by many mortgage producers.

“When we made the decision not to do these loans, we got beat up in the market.  We also lost a number of mortgage producers who could make more money working for Countrywide – of course a number of these producers would now like to come back to BB&T.  We believe that doing our best to help our clients make the right financial decisions is good for BB&T.  I believe that while there may be short-term trade-offs by sticking to your values, you are never making a sacrifice in the long run, if your values are rational” (Parnell and Dent 589).