To Whom Does an Ethical Business Owe a Responsibility?

In my prior essay on ethics and capitalism , I argued that Ethical Capitalism is not inherently impossible. Now that I've established that it is possible--and even in a company's best interest--to behave ethically, I'm going to examine where a business owes its ethical responsibilities. A common myth today is that a company owes its primary, and possibly sole, responsibility to its shareholders. I will argue that an ethical company's true responsibilities lie with many different groups of people, both for practical and for ethical reasons.

No person or organization can hope to take care of everyone and everything which might need help. So, the first step is to figure out who a company is ethically obligated to worry about. We need to have a working criterion for deciding who a business owes its ethical responsibilities:

A Company Owes an Ethical Responsibility To Those Individuals and Groups Who Are Responsible for Its Success.

I chose this for both an ethical reason, and a practical one. The ethical reason is one of mutuality: if a business has been helped by the actions of a third party, there is an obligation to recognize that. The practical reason is that if someone helped a business succeed, the same person or group could possibly cause it to fail, should the company misbehave and invite retribution.

Four groups of people are generally responsible for the success of a business: Employees, customers, the community, and shareholders. Ethical companies need to balance their responsibilities to these groups, especially when they conflict. Of these four, the shareholders are generally the least important, especially for public companies, even though the "responsibility to the shareholders" is often cited as a company's reason for taking a particular action vs. another.

Employees

Employees are the group most responsible for a company's success, since a business is essentially nothing more than a collection of individuals gathered together for a common purpose and with a certain amount of infrastructure and capital. Without employees (and I include management in this category), a business literally could not exist. Profitable companies do not spontaneously form out of piles of equipment, software, and money.

An important caveat, however. Companies owe an ethical responsibility to employees only insofar as the employees contribute to the success of the company. It is not unethical to fire an underperforming employee. It is also important to keep in mind that changing industry or economic conditions may force a company to do things (like lay people off) which hurt employees, but are necessary to the survival of the business.

Customers

Nearly as important as employees are customers. No company can be profitable without them, and the customers provide purpose and direction (and money) to a company.

Just as with employees, however, not all customers contribute to the success of a company. Some customers are too demanding, abusive to employees, or insist on doing business in a way which is unprofitable. When this happens, a company will normally be better off in the long run by politely refusing to do business with the problem customer. Of course, if the problem customer is, for example, Wal-Mart, this may be easier said than done. Management has to keep in mind that it cannot afford to ignore the needs of the profitable customers in order to satisfy the demands of the problem customer.

Community

By "community" I mean the cities, states, and countries in which a business operates. It isn't as obvious as with employees and customers, but the community is vitally important to the success or failure of a business. A healthy community provides many things which a business needs to function:

• A pool of potential employees with the necessary skills and experience.

• Customers who want or need what the business produces.

• Infrastructure, including things like roads, power, water, phone, Internet, and other necessary services.

• Food, shelter, education, a safe environment, and other elements needed for people to focus on the business, rather than basic needs of themselves or their families.

• Social and cultural opportunities which keep people stimulated and productive.

• Mechanisms for resolving disputes (laws, courts, regulations, etc.) in a fair, predictable, and reasonable fashion.

Most of these things are invisible when present, and we tend to take them for granted. Nevertheless, the communities a company operates in are important to its success: just look at how hard it is to do business in a war zone, or in a country where the laws are uncertain.

As a result, companies bear an important ethical responsibility to improve their communities. When successful, this benefits the company by giving it a better environment to operate in.

Shareholders

Even though shareholders "own" a company in a legal sense, in most public companies they contribute little to the success or failure of the business. Unless shareholders are active in the business (for example, company founders, or employees/management with significant holdings of company stock), shareholders contribute only money to a company's success. Money is the most fungible commodity that it exists: there is no difference between $1.00 from a hedge fund in New York and $1.00 from a grandmother in Toledo.

This is not to say that a company owes no ethical responsibilities to its shareholders, but that other duties are generally more important. Unfortunately, the bias recently has been to pay attention to the shareholders before the other groups. Shareholders, however, generally have the option of selling their stock at any time for market value at little cost, and bear no risk beyond the value of the shares themselves. Employees, customers, and the community have a much harder time disengaging themselves from a business; and can be hurt very badly by a company's misdeeds.

Ethical Responsibilities of a Business

Most companies are obligated to behave ethically towards their employees, customers, community, and shareholders, in roughly that order. Next, I will examine what those duties are, and how a business can fulfill them.