The False Choice Between Business and Ethics

R. Edward Freeman and Bidhan (Bobby) L. Parmar

April 25, 2019 Reading Time: 6 min

Should there be an imperative — moral or otherwise — to consider what’s fair when

making a business transaction?
Consider this situation — let’s call it Case A. You’re at a yard sale and pick up a violin.
The tag says $50. Let’s imagine you actually know quite a bit about violins, and you
know that this particular violin, if it were auctioned, could yield close to $1 million.
Should you tell the current owners they’re making a terrible mistake by pricing it at
$50? Or should you simply buy the violin and profit from a lucrative resale?
Over our years of teaching executives and business students, we’ve heard arguments
on both sides. Some contend that the price reflects the worth to the seller, that buyers
often have additional information, and that it is perfectly ethical to profit from this
asymmetry of information. Some say that if the yard sale was at a friend’s house, it
would be wrong to profit at that person’s expense — that business is about
relationships, and a good relationship requires not taking advantage of each other.
Others maintain that they would buy the violin but feel guilty for taking advantage of
the seller, while others say that guilt over such a transaction would prevent them from
buying the violin for such a low price.
Now consider another situation. We’ll call it Case B. In this case, the transaction is in a
music store. This time you don’t know anything about violins, but you want to buy one
to learn to play. The store owner brings you one with a $500 price tag and says, “this
one will do just what you want it to do.” Unknown to you, this violin is cheaply made
and not worth anywhere near $500. You buy the violin.
Has the store owner done something wrong?
Again, we’ve heard many conflicting arguments about this case. Some say it’s a case
of caveat emptor, let the buyer beware — the hallmark, they say, of both capitalism and
the legal system. Others argue that the store owner is committing fraud by overpricing
the violin. Still others retort that the price paid reflects the value perceived by the buyer.
The buyer in Case B is in the same position as the sellers in Case A: In both instances,
there is information asymmetry.
Given more buyers and sellers, over time such asymmetry can be minimized. Buyers
and sellers become more market-savvy, and others start to provide missing information
to market participants. Some even move in and change how a particular good is offered,
with more options and price points.
However, before markets can work out all of these issues, what is to be done in these
particular transactions? While it’s nice to know that markets will work these things out
in the long run and on average, we live our lives in the here and now — not in the long
run or on average.

The Separation Fallacy

Cases A and B are examples of what business ethicists call the separation fallacy. This
is the tendency in business theory — and in business ethics theory — to separate the
business case from the ethics case. In Case A, the business case says, “buy the violin for
$50.” In Case B, the business case says, “sell the violin for whatever the customer is
willing to pay.” In both Case A and Case B, the ethics case says, “don’t take advantage of
others.” In reality, though, many people want to know how to integrate the business
case and the ethics case.
Why? Because decisions in these kinds of transactions don’t have just financial
outcomes — they have social and psychological outcomes, too. Certainly, there is a
prominent view of business that says the only rule is to try to maximize one’s own self-
interest. But that defines self-interestextremely narrowly, considering only the
consequences that accrue to the self alone and that can be measured in financial value.
No less a philosopher than economist Adam Smith had a very different view of self-
interest. Smith understood even back in the 18th century that we are social creatures
at heart. Indeed, the opening sentence of his Theory of Moral Sentiments of 1759 says:
“How selfish soever man may be supposed, there are evidently some principles in
his nature, which interest him in the fortune of others, and render their happiness
necessary to him, though he derives nothing from it except the pleasure of seeing
it.”
The division that many people make between the business case and the ethics case of a
transaction should not be a given in business. Integrating these concerns, though, will
require rethinking the most basic ideas of both business and ethics.

The Relational View of Business

Seeing the self in relation to others has evolutionary roots. Michael Tomasello (Max
Planck Institute for Evolutionary Anthropology, Leipzig, Germany) and Amrisha Vaish
(University of Virginia) have argued that humans became “ultra-social” because of how
they hunted, working together to track large game as early as 400,000 years ago. By
joining together, human beings increased their odds of survival. But collaboration to
gather food was just the beginning. Working together allowed human beings to see
themselves in relation to others, as a part of a group. Tomasello and Vaish term
this collective intentionality — the idea that two minds are paying attention to the same
thing and working toward the same goals. Collective intentionality is also a basis for
morality, business, and capitalism.
More companies today are having conversations about ethics and adopting Smith’s
point of view, rejecting the narrow, transactional view of business in favor of a more
relationship-oriented approach. Companies such as Unilever, The Container Store, and
Salesforce have all taken actions that show an intention to see business as a set of
relationships that are interconnected over time and over all those stakeholders who
will be affected by the business or who can impact it themselves. This approach says
that if you’re a buyer, you treat sellers like you will be doing business with them for a
long period. If you’re a seller, you treat the customer as a lifetime client who should not
be taken advantage of in a particular transaction.
Relationships require investment and work. Business relationships are similar to
family relationships, marriages, and the collaborations of teachers and students. None
of these connections are reducible to a set of transactions, because relationships shape
us as much as we shape them. Of course, self-interest plays a role but so does our ability
to care for others. We can do things that are simultaneously other-regarding and self-
interested. Human beings are complicated and have multiple motives, in life and in
business.
Let’s go back to the cases we raised at the beginning of this column. In both violin
situations, we could imagine crafting solutions where both parties could be made better
off. In Case A, the buyer could act as an agent for the sellers, who clearly don’t know
much about violins. In Case B, the seller could decide to work with the customer over
time, selling an inexpensive violin initially, but also pointing the customer to lessons
and, eventually, a more expensive, but worthwhile, violin.
Capitalism is the greatest system of social cooperation we have ever invented. It is
about how we create value for others and trade with them. Competition and self-
interest play a role, but so, too, does collaboration. Seeing business as a set of
relationships that exist for a long period is one of the most important elements in
thinking about building a successful company. While it can be tempting to take
shortcuts to benefit only ourselves, when we do so, we risk destroying the system of
cooperation that makes us distinctly human.

ABOUT THE AUTHORS

R. Edward Freeman (@re_freeman) is a professor of strategy, ethics, and

entrepreneurship at the Darden School of Business at the University of Virginia.
Bidhan (Bobby) L. Parmar is an associate professor at the Darden School.
Ethics as Conversation: A Process for Progress

R. Edward Freeman and Bidhan (Bobby) L. Parmar

January 28, 2019 Reading Time: 5 min

Most organizations can agree on what questions to consider before making a decision
about marketing, finance, or operations. But many stumble when the issue at hand has
ethical outcomes.
One former CEO of a large financial services company put it this way in a recent
conversation: “By the time the issue gets to me, it’s been analyzed, scrubbed, and
PowerPointed to where I don’t have much idea what really might have happened. But I
still have to make a decision that has ethical consequences.” He said this meant he had
to be confident that people in his organization had posed roughly the same questions
he would ask. He wasn’t so sure that was the case.
We began to use this insight in our conversations with executives and students. We ask
them to define what we call “your ethics framework.” Practically, this means defining
what set of questions you want to be sure you ask when confronted with a decision or
issue that has ethical implications.
The point of asking these questions is partly to anticipate how others might evaluate
and interpret your choices and therefore to take those criteria into account as you
devise a plan. The questions also help leaders formulate the problem or opportunity in
a more nuanced way, which leads to more effective action. You are less likely to be
blindsided by negative reactions if you have fully considered a problem.
The exact questions to pose may differ by company, depending on its purpose, its
business model, or its more fundamental values. Nonetheless, we suggest seven basic
queries that leaders should use to make better decisions on tough issues.
How does this make me feel? One of the hallmarks of tough ethical issues is that they
have an emotional basis as well as a factual one. Your stakeholders will not necessarily
evaluate your choices rationally, particularly if they are affected negatively. Attending
to your own emotions is one way to anticipate stakeholder responses. Of course, this
question presupposes a fairly careful analysis of the facts and circumstances, but if we
do not try to get a handle on the emotional part of an ethics problem, we run the risk of
just intellectualizing it. We need to get better at listening to our feelings as well as doing
a hard-nosed analysis of facts, constraints, and contexts.
Who is affected and how? Every person is enmeshed in a complex array of
relationships with others who can be harmed or benefited by their choices. Likewise,
organizations have a set of stakeholders with whom they are trying to create value.
Knowing how a particular ethical issue affects these relationships is crucial for good
decision-making. In addition, some of these stakeholders — both personal and
organizational — may well have legitimate claims that must be respected. Tough
analysis of these “who” and “how” questions are prerequisites for effective action.
Who can I talk to about this issue? We learn ethical values and principles through our
conversations with family, friends, and others. When we find ourselves involved in a
situation with ethical consequences, it is a good idea to reach out to confidants to talk
about what we should do. Sometimes, reasons of confidentiality (itself an ethical
concept) preclude sharing the specifics of a problem, but in most cases, we can still get
useful advice from those who won’t simply tell us what we want to hear.
Are there alternative framings of the issue that I should explore? Once a decision
is framed to be about a certain issue, making the decision itself is often fairly easy.
As American philosopher John Dewey noted, “…a problem well put is half-solved.”
However, framing the issue is usually the most difficult part of the process. If an
executive frames an issue only in terms of “what is best for shareholders,” the answer
she reaches may be fundamentally different than if she had framed it as “what is best
for stakeholders.”
What are my best options? Thinking about framing leads to considering new ways to
approach an issue, especially the timing of different alternatives and their associated
actions. Considering different choices is critical for effective action because each has its
own set of strengths and weaknesses. When decision makers rely on only a single idea,
they are more likely to be blind to its weaknesses. Having multiple possibilities for
addressing an issue increases learning as you compare and contrast their
consequences. Managers may also feel pressure to make trade-offs among stakeholders
when they don’t see routes to satisfy multiple groups. In dealing with complex
stakeholder issues, options also need to be tested and refined with stakeholders’ input.
What would happen if my thinking and decision became public? Ethics is deeply
personal, but it is also deeply social. Many people respond to criticism of their ethics by
saying, “I have to look at myself in the mirror. I have to live with myself.” That is, of
course, correct. But your organization also has to live with you and your choices. Ethical
decision-making must pass some kind of publicitytest. What would happen to your
organization if your decisions were on the front page of the newspaper? Would you still
be proud to tell your children or other loved ones what you did?
What would cause me to change my mind and my decision? We often think that
once we make a decision, the issue is closed. But a key feature of ethical choices is that
this is rarely the case. We need to continuously monitor circumstances to be able to
decide whether our decision needs to be modified. This is especially true with the
deployment of new technologies: As the use of a particular technology emerges and we
learn more about its consequences, we need to be ready to modify our course. The
attitude of humility that this question fosters is essential for continued learning and
adaptation.
Unethical behavior is harder to hide thanks to the explosion of social media. Leaders
who want to embed ethics into how their businesses operate need to articulate and
practice using questions that foster continuous conversation about what their
organizations do and how they can do it better.
Whatever your ethics framework and whatever set of questions you bring to addressing
ethical decisions, we encourage you to continuously think through them. That will help
you hone and improve them so that you and your organization can make even more
effective choices.