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 Does a moral compass help an enterprise become more competitive? To find out, Sun caught up with Dr. Adam Galinsky, Kaplan Professor of Ethics and Decision in Management at Northwestern University's Kellogg School of Management.
Q: What are the key components of business ethics?
Galinsky: When we talk about business ethics, usually we're speaking about standards of behavior in the workplace as well as with customers and partners. Companies known for high ethical standards usually have an ethical code stating that they treat everyone with dignity, don't present misleading information, and scrupulously follow rules and regulations.
Q: Why should a company be concerned about business ethics?
Galinsky: Having a moral compass leads to more effective business practices — whether in building sales, retaining employees, or reducing litigation and regulation costs. For example, people are usually willing to pay premium prices to feel good about the products they buy. Also, companies that follow certain moral codes attract better people — and these people often are willing to work harder with less compensation. It goes without saying that ethical companies are less likely to undergo the costly scrutiny of courts and regulators.
Q: Why do some people and companies engage in unethical behavior?
Galinsky: It's important to understand that people don't engage in unethical behavior when the incentives are small. They tend to engage in unethical behavior when the incentives are large. Keep in mind also that unethical behavior usually breeds more unethical behavior — because hiding that first misdeed usually requires more misdeeds — and for some businesses, like Enron, this can lead down a path that ends in destruction.
Moral behavior needs to be embedded in a supportive social infrastructure that promotes consistent behavior.
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Q: How do you get people to adhere to ethical standards in business?
Galinsky: Moral behavior needs to be embedded in a supportive social infrastructure that promotes consistent behavior. For starters, company management can lead by example. A formal incentive structure for adhering to standards also goes a long way in establishing moral behavior. Communicating these standards with all stakeholders is critical, because an organization needs to show its stakeholders that moral behavior is a serious matter, further reinforcing these norms.
Q: Can incentives for certain kinds of behavior create ethical problems?
Galinsky: Incentive systems can both create and diminish unethical behavior. Large incentives can invite unethical behavior. And then there are weak sanction systems — those with low detection probabilities or small penalties — which are tragically ineffective and can corrupt normal behavioral regulators, such as guilt. In fact, one study found that when small fines were introduced to reduce a negative behavior (like being late), that behavior actually increased.
Small fines and the low probability of detection can alter decisions from being based on ethical considerations to crass considerations simply based on economic concerns. This is why norms and culture matter so much.
Q: What's the importance of business ethics for executive leadership?
Galinsky: I'm afraid to say that much of my research shows that people in positions of power tend to become more egocentric and self-focused. This limits their capacity to understand the viewpoints of other people, which may provide needed insight. However, an ethical company that values the contributions of its employees is more likely to be innovative in the marketplace.
Q: How should business ethics affect employee behavior?
Galinsky: Milton Friedman once stated that the employees of a firm have the moral obligation to maximize shareholder value. Deviating from this directive, he believed, is like a form of taxation without representation, because shareholder money gets spent in ways that does not maximize returns. This, I think, needs to be tempered with a stakeholder theory of the firm, which deals with how employees interact with suppliers, partners, customers, and their co-workers - and these are all interactions that should be encapsulated in a company's code of ethics.
Q: What's the importance of business ethics in the boardroom?
Galinsky: Business ethics are critical for members of company boards, as these people should provide a great deal of moral leadership. But in some cases, board members turn a blind eye to developing problems, and this can make bad situations worse. Still, board members often find it difficult to fulfill their ethical duties, as recent research by my colleagues Ithai Stern and Jim Westphal shows. Board members who are zealous about fulfilling their duties often get punished by not being selected for boards at other companies.
Cultural differences and different business practices around the world can present ethical challenges.
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Q: What role should legislation play in regulating business ethics?
Galinsky: Legislating some ethical behavior can help keep the marketplace free of monopolistic behavior and safeguard stakeholders such as partners, customers, and investors. What's more, a transaction between two organizations can affect other parties — and these externalities, as economists call them, are sometimes best addressed by regulation.
Q: Does the global economy change the rules of business ethics?
Galinsky: A company's core values should be put into practice regardless of where business is being transacted. That said, cultural differences and different business practices around the world can present ethical challenges. But in some areas, forward-looking companies have actually been able to improve conditions while still being competitive.
Q: How does the increased use of technology affect business ethics?
Galinsky: Some of the biggest issues with ethics and technology can be found in security and privacy concerns. Ethical companies do their best to protect company assets without making people feel stifled — and this balance is increasingly important for innovation and creativity.
About the Kellogg School of Management and Adam Galinsky
In 2006, the Kellogg School was ranked the No. 3 graduate school of business in the United States by BusinessWeek magazine. Adam Galinsky teaches and researches the subjects of management and organizations. He holds a Ph.D. in social psychology from Princeton University and an undergraduate degree from Harvard University.
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