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BUSINESS ETHICS AND WEALTH CREATION IS THERE A CATHOLIC DEFICIT

By Sandra Clark,2014-06-17 23:48
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BUSINESS ETHICS AND WEALTH CREATION IS THERE A CATHOLIC DEFICIT ...

Business Ethics and Wealth Creation:

    Conceptual Clarifications and Research Questions

    Georges Enderle

    John T. Ryan, Jr. Professor

    of International Business Ethics

    Mendoza College of Business

    University of Notre Dame

    Notre Dame, IN 46556

    Email: genderle@nd.edu

    Business Ethics and Wealth Creation:

    Conceptual Clarifications and Research Questions

Introduction

Three considerations led me to the choice and investigation of this topic of business ethics and wealth

    creation. In his fascinating and powerful historical account “why some [nations] are so rich and some

    so poor,” David Landes (1999) scrutinizes the winners and losers in the process of wealth creation over

    the last 50 years. On the winners‟ side, in addition to “the thirty wonderful years from 1945 to 1975”

    of France and the “economic miracle” in Germany, he highlights the East Asian success stories of

    Japan, the four “Little Tigers“ (South Korea, Taiwan, Singapore, and Hong Kong), and the regional

    followers such as Malaysia, Thailand, and Indonesia, referring, among others, to the World Bank‟s

    study The East Asian Miracle (1993), and adding China in his “Epilogue 1999” (Landes 1999: 524-531). The losers are the Middle East, Latin America, the countries of the Communist-Socialist

    bloc, and sub-Saharan Africa. While this “gap in wealth and health that separates rich and poor” (1999:

    xx), obviously, has been caused by multiple factors, the fact itself is enormous and provides paramount

    importance to the question of how we may understand the creation of wealth.

     A second consideration responds to the worldwide discussions about “corporate social

    responsibility” or CSR that have gained considerable momentum in the last ten years. Corporations are

    expected to care about their environmental impact, to behave as corporate citizens, to defend freedom

    on the internet, to support cultural and sports events in their communities, to help the victims of natural

    disasters such as tsunami and Katrina, to provide health care at reduced prices or for free to the needy

    who can‟t afford it, etc. Against the backdrop of this wealth of expectations, it is striking that, quite

    often, the financial and economic responsibilities of business organizations seem to be ignored, and,

    more specifically, no attention is being paid to the questions how companies can and should create

    wealth.

     Finally, surveying the management literature, a third consideration comes to mind. It seems

    fair to say that a large part of this literature assumes the companies‟ objective of “maximizing

    shareholder value” with no critical examination in economic terms. Moreover, the broader objective of

    “adding value” is often used as a black box that can be filled with any type of so-called “value.” The

notion of wealth creation is not seriously scrutinized even by prominent writers like J. Collins (1994,

    2001) and J. Porras (1994).

     Against this backdrop of global importance and widespread neglect, in the following sections,

    I first explore and clarify the notion and significance of wealth creation. Then I discuss how business

    ethics can and should be related to wealth creation. I conclude with outlining several research

    perspectives.

What is the Creation of Wealth?

    Wealth can be defined in several ways. As Robert Heilbroner states (1987, 880), “wealth is a fundamental concept in economics indeed, perhaps the conceptual starting point for the discipline.

    Despite its centrality, however, the concept of wealth has never been a matter of general consensus.”

    As for the term itself, it figures prominently in Adam Smith‟s work, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776), but is conspicuously absent from Gunnar Myrdal‟s Asian

    Drama: An Inquiry Into the Poverty of Nations (1968) and is complemented with its opposite in David Landes‟s book title, The Wealth and Poverty of Nations: Why Some Are So Rich and Some So

    Poor (1998). It is noteworthy to see how Smith‟s “wealth” is translated into other languages: as

    Wohlstand prosperity (not as: Reichtum riches, Wohlfahrt welfare, Vermögen wealth) in German, richesse riches in French, riqueza riches in Spanish and rich in Chinese.

     In order to discuss the concept of wealth, we first may concentrate on what is meant by the

    wealth of a single nation. This approach, though, seems to be outmoded and inappropriate because of

    the “decline of the nation-state” in present times, the increasing number of pressing international

    challenges and the extraordinary power of many transnational corporations. However, it also provides

    some advantages compared to other approaches. When we ask for the “wealth of a nation,” it is

    difficult to deny that wealth should encompass both private and public goods or assets, or endowments

    of two types: those that can be attributed to and controlled by individual actors, be they persons, groups

    or organizations, and those from which no actor inside the nation can be excluded. (In technical

    economic terms, “public goods” are defined by the characteristics of non-rivalry and non-exclusive consumption; see Enderle 2000.) For instance, a SARS-free environment is a “public good” and a SARS-threatened environment a “public bad” that has clearly a material component, although it might

    be difficult to put a price on it. It is obvious that the functioning of the markets and the production of private goods depend on such public goods and public bads. In contrast, when speaking of the wealth of an individual or a company, we usually consider only the assets under their control while ignoring the public goods they also benefit (or suffer) from. In the international realm, public goods are only beginning to be discussed, although they are of increasing importance and often the driving force for transnational regimes and institutions (see, e.g., Kaul et al. 1999).

     We may define the wealth of a nation as the total amount of economically relevant private and public assets including physical (or natural), financial, human, and “social” capital. Consequently, the creation of wealth includes the production of public as well as private assets, which indicates the important but limited role of the market and price mechanism. Wealth is primarily a stock (an economically relevant quantity at a certain point in time); but, in a broader sense, it also includes flows (increasing or decreasing quantities over a certain period of time). This basic distinction in economics is particularly relevant for our discussion on wealth because flows such as income per person, a commonly used indicator of the development of a country, express the economic situation of an economic actor only inadequately; the expected flows in the future are subject to a great deal of uncertainty and risk.

     Another fundamental issue, fraught with multiple difficulties, is the question of how wealth as “economically relevant stocks and flows” can be properly expressed in monetary terms and added up to a total amount of money. From the recent experiences of the U. S. stock market, we all know that there might be huge gaps between the real economic and the monetary performances of companies, as the monetary indicators are only reliable if the markets function properly. Even then, this pertains only to private and not to public goods. In other words, sound economic thinking offers serious caveats against equating money with wealth. “Making money” can be destroying wealth while creating wealth

    can be losing money. It goes without saying that making money and creating wealth should go hand in hand.

     What do we mean by the “creation” of wealth? Obviously, wealth creation is more than

    possessing wealth and is only one form of increasing wealth. According to Jacob Viner, “Aristotle . . . insisted that wealth was essential for nobility, but it must be inherited wealth. Wealth was also an essential need of the state, but it should be obtained by piracy or brigandage, and by war for the conquest of slaves, and should be maintained by slave works” (quotation in Novak 1993, 105). In the course of history, the colonial powers acquired a great deal of wealth, usually with no regard for legal

and ethical concerns, which, by and large, amounted to a redistribution rather than a creation of wealth.

    In the capitalistic system, the “acquisitive spirit,” “the accumulation of capital,” and the “acquisition

    of companies” do not necessarily entail the creation of wealth, properly speaking. It is, therefore,

    crucial to investigate what this concept of “creation” means more precisely.

     To create is to make something new and better. Take the example of Medtronic Inc., which is

    proud to be “the world‟s leading medical technology company, providing lifelong solutions to chronic

    disease” (http://www.medtronic.com). In its over fifty-year history it has developed a wide range of

    medical devices, from heart pacemakers to devices to alleviate neurological and spinal disorders and to

    manage diabetes, and it continues to be in the forefront of the industry (see Financial Times,

    “Medtronic shows off future of healthcare,” February 8, 2002). Inspired to serve the customers, its

    innovative spirit has revolutionized not only its products and services but also its production processes,

    organization, culture, and identity, while yielding continuous financial success. As this company

    illustrates, though wealth creation has a lot to do with technological innovation, it is more than that,

    since the innovation is made feasible and successful in economic and financial terms. Aiming at

    material improvement for the benefit of human lives, wealth creation includes both a material and a

    spiritual side and goes beyond the mere acquisition and accumulation of wealth. It is a qualitative

    transformation of wealth.

     On a national scale, the meaning of wealth creation can be easily understood against the

    backdrop of the debacle of a war. In the aftermath of the Second World War, Germany and Japan had

    to build up, to a large extent, new economies; and China, after the traumatic civil war of the Cultural

    Revolution (19661976), engaged in a transformation process from a centrally planned to a

    market-oriented economy. In those situations creating wealth is a national objective that mobilizes a

    great many forces for a new and better future. In general, state and companies operate on a broad

    consensus regarding the need for the creation of both public and private wealth. Without doubt, the

    material side of these endeavors is essential, but the spiritual (or ideological) side is indispensable as

    well. As a good example for both the material and spiritual commitment of companies to participate in

    public wealth creation, we may recall Konosuke Matsushita‟s determination in 1954 to continue,

    despite serious financial difficulties, the joint venture with Philips. “I definitely do not think that the

    tie-up has been a failure. . . . I did not choose to form a technical tie-up with Philips in order to stimulate

    the growth of Matsushita Electric. I did not do it to gain personal publicity. I did it in order to bring the

    underdeveloped electronics industry in Japan up to world standards more quickly.” (Yamaguchi 1997,

2 6)

     In further exploring the notion of wealth, we may question its purpose and use, first in

    economic terms and then in noneconomic terms as well. Besides the fact that wealth creation can have

    intrinsic value (for instance, the hard and diligent work and great enjoyment of producing life-saving

    medical equipment), wealth has instrumental value, being usable for consumption or investment. If

    consumption is the sole purpose, the road to poverty is predetermined. For an historic example, we may

    recall the decline of Spain in the seventeenth century. As Landes writes (1998, 175), “Spain . . .

    became (or stayed) poor because it had too much money. The nations that did the work learned and

    kept good habits, while seeking new ways to do the job faster and better. The Spanish, on the other

    hand, indulged their penchant for status, leisure, and enjoyment what Carlo Cipolla calls „the prevalent hidalgo mentality‟.” And Landes offers a moral (relevant to the United States of today): “Easy money is bad for you. It represents short-run gain that will be paid for in immediate distortions and later

    regrets.” (173)

     Investment is necessary for both wealth maintenance and growth. Of course, if the investment

    rate is very high, the present generation may carry an undue burden of reduced consumption for the

    benefit of future generations. However, today‟s consumer society tends to move in the opposite

    direction with a high preference for consumption to the detriment of investment. This trend becomes

    particularly clear when we seriously take into account not only “the nature of wealth” but also “the

    wealth of nature.”

    3 One can reasonably argue that humankind at present is over-exploiting nature, the

    costs of which future generations will have to pay. It is therefore imperative to include the concept of

    sustainability in our notions of consumption, investment, and wealth. Wealth creation must be

    “sustainable,” fulfilling the demand “to meet the needs of the present generation without

    compromising the ability of future generations to meet their own needs” (as defined by the World

    Commission on Environment and Development, see WCED 1987).

     In addition, it is easily ignored that wealth creation involves a distributive dimension,

    permeating all of its stages from the preconditions to the generation process, the outcome, and the use

    for and allocation within consumption and investment. In fact, the productive and the distributive

    dimension of wealth creation are intrinsically interrelated. However, the separation between

    “producing the pie” and “sharing the pie” has marked for too long the ideological struggle between

    “the right” and “the left,” despite its flawed economic underpinning. The time has now come to

    overcome this misleading separation and to take the interrelations between the two dimensions (again)

into account.

     Having clarified different aspects of the concept of wealth creation, we now turn to the question of motivation. What motivates people, companies, and countries to engage in wealth creation? Common answers in the economic and sociological literature are self-interest, greed, the will to survive, the desire for power aggrandizement, the enjoyment of riches, and the glory, honor, and well-being of nations. However, these motivations, taken individually or in mixed combinations, are rarely related specifically to the creation of wealth, driving economic activities in general and, most often, inciting merely the acquisition and possession of wealth. When economic activities clearly focus on wealth creation, other motivations such as the entrepreneurial spirit, the desire to serve others, and the joie de

    trouver (or the „joy of finding‟ that, in Landes‟s judgment [1998, 58], was the distinctive motivation in

    medieval Europe as compared to Islamic countries and China) become more important. At the same time, the purpose of business and consequently its role in society gets elevated. Business is not any longer just about making money and acquiring wealth, relegated to the role of the ugly, yet indispensable servant that provides others with the material means to pursue higher, i.e., spiritual ends. Accordingly, it does not deserve a low reputation that is, unfortunately, even reinforced by those who stress the purely material and instrumental view. Rather, it is a creative and thus noble activity including both material and spiritual aspects, driven by a mix of motivations that are self- and other-regarding.

     We may ask why, in history, wealth creation has often been ignored, disregarded or even treated with contempt. It seems to me that these attitudes depend on the valuation of the material world and the “bodiliness” of the human person as well as on the notion of creation. If the material world is considered inferior or even evil and if hostility towards the human body prevails, wealth cannot but share these qualities and is likely to be denigrated. Operating under those assumptions, it becomes nonsensical to produce such wealth, were it not for another, really valuable purpose. Moreover, without proper understanding, the creation of wealth cannot be really appreciated for its capacity to serve as a purpose of economic activity that matters more than the possession and acquisition of wealth. In sum, the determined affirmation that wealth creation is both good and necessary constitutes an essential prerequisite for thriving business in the long run. This necessarily includes, as mentioned above, a distributive dimension that permeates the entire creation process. It deeply affects the motivation for wealth creation as this motivation, in turn, strongly impacts wealth distribution.

The Relevance of Wealth Creation for Business Ethics

    After exploring the meaning of wealth creation, we now try to relate it to business ethics. But, by doing

    4 After all, business is about producing wealth and ethics has to make sure that this is so, aren't we sending owls to Athens? Isn't this relationship so obvious that any thought would be

    done properly. Nevertheless, I would like to argue that we need to pay serious attention to this superfluous?

    relationship because, without this focus, business ethics becomes a superficial undertaking, evading

    the struggle with arguably the central issue of economic activity while expanding its reach far beyond

    what it can and should deliver.

     In my view, a thorough understanding of wealth creation enables us to sharpen our economic

    critique of fashionable and short-sighted management recipes and to bring the power of ethics to bear

    where it matters most. From the conceptual analysis in the previous section we can draw a number of

    lessons for a sound, comprehensive, and differentiated conception of business ethics. To equate

    business with just making money is not only questionable from the ethical perspective that asks for the

    ethical quality of both its means and its ends, but also from the economic perspective. Without

    adequate economic underpinning, making a lot of money can entail the destruction of much wealth, as

    the recent debacles of Enron and the like have demonstrated.

    5

     It is relatively easy, though necessary as well, to criticize scandalous business behavior. But

    from the perspective of wealth creation, examples of an innovative spirit and best practices of "making

    things new and better" are more inspiring and should play a more prominent role in business ethics

    research and teaching. They would also highlight the fact that wealth creation forces the economic

    actor to look beyond the short term and definitively adopt a long-term perspective as well, in which

    "sustainability" is the key. As examples we may mention Medtronic Inc. (see above), Rohner Textil

    AG (www.climatex.com), and the Grameen Bank (www.grameen-info.org; the latter two companies

    being featured in Enderle 2004).

     When exploring the concept of the wealth of nations, we concluded that it should encompass

    both private and public wealth. As we know from economic theory, properly functioning markets are

    powerful instruments to create private wealth, but they fail in creating public wealth. This involves

    far-reaching implications for business ethics. Business ethics should not be limited to the creation of

    private wealth and reduced to corporate ethics, that is the ethics of business organizations, because the

    economy is bigger than the realm of markets and companies. Rather, business ethics should include the ethics of the economic system (and therefore go beyond "market morality"). It is only in this context that the creation of wealth and, we may add, the distribution of wealth, can be treated in a proper and comprehensive manner.

     With regard to globalization, wealth creation provides a focus for business ethics, the importance of which cannot be overestimated. As long as globalization is the acquisition of wealth, most often by the rich from the poor, it does not create but only reshuffles and redistributes wealth, although accumulated wealth may masquerade as created wealth. The creation of sustainable wealth is a highly complex and demanding process and cannot be achieved without paying serious attention to its distributional preconditions and consequences. Moreover, if it is true at the national level that the creation of private wealth necessitates a certain amount of public wealth, the same is likely to hold at the international and global levels. Given the difficulties in creating public wealth at the local and national levels, one can easily imagine the almost insurmountable problems to do so at the global level.

     These difficulties in creating wealth call for a thorough examination of motivations. They should be strong and effective, providing the driving force necessary not simply for acquiring and possessing wealth but, more importantly, for creating wealth. Furthermore, they should aim not only at private, but also at public wealth at all levels, from the local to the global. Recalling the array of motivations indicated above, I suggest considering a mix of motivations that are self- and other-regarding. Certainly, self-interest and the honor of the country remain powerful driving forces and, properly understood, are ethically legitimate. But if they are purported as the sole important motivation (for economic activity), they are questionable on empirical grounds and can involve grave inconsistencies (for instance, the self-interest of the manager may conflict with the self-interest of his company or the honor of the country may require the sacrifice of the individual‟s interests). For the

    very creation of wealth, as mentioned above, other motivations such as the entrepreneurial spirit, service to others, and the joy of finding (that might be combined with the will to make a decent living for oneself and one's family) assume more importance and are indispensable to producing public wealth. Generally speaking, the enormous challenges of creating wealth require a shift in motivations that shape the cultures of companies, countries and the world. But such a shift cannot take place unless it is internalized and advanced by individuals.

     The motivation for wealth creation can be further strengthened to the extent that the production of economic wealth is intrinsically coupled with the production of non-economic, e.g., social and

    environmental, wealth designed "to hit two birds with one stone." No doubt, to achieve this is an even bigger challenge to the entrepreneurial spirit, but the gain is bigger as well. At the organizational level, companies fulfill, with the same strategies, not only economic but also social and environmental responsibilities, these different dimensions of corporate activities reinforcing, not weakening, each other. To give a few examples: Activities such as feeding hungry workers in poor areas will improve their productivity. Empowerment of workers on the shop floor will have a similar wealth-enhancing effect. Extending a plantation‟s water system into the local squatter community or investing in a hospital will improve worker health and motivation with a resulting productivity and positive cash-flow impact. In the environmental realm, programs to reduce energy consumption can enhance wealth. In my view, such a "balanced" approach has a long way to go and is one of the top challenges for corporate ethics in the twenty-first century (see Enderle and Tavis 1998, Enderle 2002).

     As alluded to at the beginning of this section, business currently faces a vast array of expectations, particularly in terms of "corporate social responsibility," that are often vague and almost limitless. Against this tendency of holding business responsible for nearly everything, the focus on wealth creation can be an important corrective. Since companies are primarily economic organizations, they have to prove their ethical commitment, first of all, in this regard. Unfortunately, we can observe too many businesses today that try to cover up their poor ethical performance in core activities by expanding lavishly into all kinds of "social responsibilities." With this criticism I do not endorse Milton Friedman's position that the sole responsibility of the executive is to maximize profit. The notion of wealth creation is much richer, relates to the company as such, and to a large extent can be combined with the creation of social and environmental wealth without being "hypocritical."

     However, there is a point at which further creation of social and environmental wealth can be achieved only at the expense of the company's further economic growth. When all means to reconcile those diverging paths are exhausted, the costs for needed social and environmental improvements have to be clearly stated and fairly shared with other social actors. Cost transparency, ability-to-pay and shared responsibility should be the principles for further corporate involvement in addressing societal challenges.

Outlining Several Research Perspectives

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