Good ethics lead to healthy profits

Most people believe that business has no social conscience. This view is reinforced by executives who uncritically accept Milton Friedman's assertion that "the social responsibility of business is to maximise profits". This is not only morally bankrupt, but is bad for business.

The guiding principle of business economics is not the maximisation of profits, it is the avoidance of loss, argued Peter Drucker, management guru and economist. "It is the first duty of a business to survive. This is not to say that profits are unimportant." An enterprise must make enough to cover future risks and to enable it to stay in business.

Many firms miss this point. In cutting costs to maximise profits, they liquidate assets and under-invest in innovation

Drucker suggests there is only one valid definition of business purpose: to create a customer. "It is the customer who determines what a business is. What the customer thinks he is buying, what he considers 'value', is decisive."

At last month's Royal Society of Arts lecture on ethics and the role of business in society, Professor John Kay, director of the Said Business School at Oxford, said critics of business since Aristotle's time have argued that business, and the people engaged in it, are selfish in their motivation, narrow in their interests, and instrumental in their behaviour.

"In the last 20 years or so something very odd has happened," he said. "This unattractive characterisation of business has been enthusiastically adopted by business people themselves. They routinely assert that profit is the defining purpose of business activity, that their responsibilities to society do not extend beyond the constraints imposed by law and regulation, and that their obligations to their employees and customers are essentially incidental to their primary duty to shareholders. They describe the nature and purpose of business in terms which would seem grotesque and repellent if applied to other spheres of life. This representation of business undermines successful business itself."

Professor Kay's research on the characteristics of "exceptionally successful companies" shows that: "Whatever their common features, exceptional focus on profitability did not seem to be among them. They were particularly profitable, but not particularly profit oriented, and that is an important distinction."

Business is a profession, he said. "Successful businesses serve the needs of their customers, provide a rewarding environment for their workers, satisfy the needs of those who finance them, and support the development of their communities."

Andrew Wilson, director of the Ashridge Centre for Business and Society, makes a similar point. "To sustain long-term development, businesses need to be managed for all their stakeholders. People want to do business with people they trust."

A long-term study in over 100 UK manufacturing companies, the Sheffield Effectiveness Programme, looked at which factors most influence company effectiveness and so financial performance. It found that human resource management is the most powerful single predictor of change in company performance - far more so than R&D, technology, quality or strategy. "If managers wish to influence the performance of their companies, the most important area they should emphasise is the management of people," it said.

Maximising profits in the name of shareholders - at the expense of customers, employees, the local community and other stakeholders - actually betrays the shareholder. It endangers the survival of the business and so shareholders' investments. Unethical businesses tend to have a poor record of long-term survival, thank goodness.