The Emergence of Business Ethics

Krishna S. Dhir

Hülsmann described a free market system as a system of "social cooperation based on the respect of private property rights."1 Adam Smith described the private acquisition of goods and their "truck and barter" for other goods, to be part of the "range of natural liberty," and John Locke claimed that the right to property requires no justification because it is rooted in the self-evident, axiomatic right to freedom.2 In a market system that is entirely free, each individual who engaged in any business transaction would be free to utilize his own intellectual and material properties, along with his own physical and intellectual capacities. Free competition in the business environment would also constrain the individual from using the properties and capacities of another. However, within the limits of using one's own properties and capabilities, each individual would be free to deploy any set of precepts to their conduct. Not only would the individual be in a position to define their own ethical system, they could enforce the system by making it a prerequisite for a business transaction, demanding its respect as a precondition for cooperating with others. Business ethics emerges from a system of beliefs and values held by individuals. Each individual engaging in a business transaction has an expectation of conduct on the part of the other individual participating in the transaction that is acceptable to them, per their own ethical system. Business ethics thus arises from the expectation of others.

A business transaction involves a minimum of two individuals, and as a result of the transaction, property changes hands. The buyer seeks to purchase factors of production such as raw materials, tools, or services, from the seller, whereas the seller seeks to sell goods or services to the buyer. If each individual adheres rigidly to an ethical system related to their property and abilities, and to the precepts of conduct that are entirely distinct and differentiated from those of the other, a transaction is not likely to materialize. The individual buying the good or service expects that the asset or service acquired will become their property, which may then be enjoyed in whatever manner they choose, even as they expect the seller to give up the right to do the same. The seller expects to be adequately compensated through the acquisition of assets of value deemed by them to be of at least equal value to that of the asset being sold. Each expects that the transaction will be based on free will exercised by each party, without coercion. To form a basis for a transaction to occur, a set of precepts must therefore emerge based on elements of the respective ethical systems that they share, which adequately recognizes the property rights and respects the ethical system of the other. As stated by Hülsmann, "By the very nature of their activities, businessmen are inclined to consciously endorse the legitimacy of private property as an ethical postulate . . . there prevails in business communities a tendency for the spontaneous (freely chosen) convergence of all persons toward such an ethics."3 It is implied that no institutionalized moral authority is required to bring about such a convergence.

I t could be argued that in seeking increased economic value, business encourages greed and deviation from ethical conduct. "Business thrives at the expense of its competitors and that it therefore does not encourage . . . a spirit of cooperation."4 However, Hülsmann counters this argument noting that "as long as private property rights are respected, competition cannot come at anybody's expense in the sense that it destroys physical property."5 Competition may indeed result in the reduction of the market value of goods or services, but as a result of market forces, and not by coercion or violence to individual rights. An individual in a competitive situation may come to realize that a collaborative strategy, one that pools complimentary resources and the abilities of two or more individuals to address a competitive challenge, might bring about improved outcomes in the marketplace. A group of individuals might, therefore, come together to form an organization that realizes synergy and efficiency. Others, too, may choose to interact with this organization to realize benefits. As was the case with the interaction between a buyer and a seller, an individual collaborating with members of their own organization would seek in such interaction a system of ethics and behavior that is consistent with one's own precepts. Each member of the organization would expect that the conduct of the organization as a whole is based on free will exercised by each of its members without coercion. A common set of precepts, shared by the individuals, has to emerge through collaboration between the organizational members and based on shared elements of their respective ethical systems, that adequately recognizes the property rights of the other and respects their ethical system, for a transaction to occur. This common set of precepts becomes the foundation for corporate ethics. The ethics of collaboration emerges from the recognition that an organization's pursuit of a common mission and set of goals requires adherence to a shared ethical system. Once again, corporate ethics arises from the expectation of others.

Corporate ethics may be further shaped by the expectation of external stakeholders of a business organization. Hülsmann goes so far as to assert that the spontaneous convergence of interacting parties toward a common ethics creates opportunities for "virtues such as honesty and justice."6 Indeed, having recognized a modern corporation as a legal entity, society expects it to be socially responsible. Hawtrey and Dullard state that, "in the eyes of . . . the community at large, the corporate sector should be intentional and collegial about virtue."7 According to Novak, "a great moral responsibility is inherent in the existence of corporations."8 Despite this, a litany of corporate scandals have been observed through much of the history of the institution of corporations.

In the aftermath of the Enron debacle in January 2002, the Business Week/Harris poll revealed that only 33 percent of individuals living in the United States believed that large companies had ethical business practices, and just 26 percent believed that they were straightforward and honest in their dealings with consumers and employees.9 The situation has not improved since then. In December 2010, a new Harris poll found that the oil, pharmaceutical, health insurance, and tobacco industries, as well as the telecommunications and automobile industries, were deemed least likely to be honest and trustworthy. Oil companies were trusted by only 4 percent of those polled, and tobacco companies by a dismal 2 percent. The telecommunications and managed-care industries were least trusted to handle personally identified information.10

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