The business of ethics

It is estimated that 85 percent of all US corporations have instituted some form of ethical regulation, like codes of ethics, conduct principles, training programmes, and Boards of Directors' ethics committees. And business ethics are not just about paper codes. Day-to-day company operations in marketing, advertising, purchasing, human resources and accounting are now said to be ethical minefields. Major decisions are delayed while lawyers, 'ethics officers' and PR managers review minor issues.

The real impetus behind the demand for business ethics has not come from public pressure, but from within the corporation, and in most cases from the top down. The days of the self-assured captain of industry directing the corporation from the front are no more. The need to present an ethically correct image now appears often to supercede other, more conventional business considerations.

Chief executive officers (CEOs) themselves are now coming under the control of moral codes and regulations - typically introduced by shareholders who are no longer prepared passively to sit back and take their dividends. The 'corporate governance movement' of shareholders has become a major force, actively intervening in how CEOs manage their companies. And this is not simply a case of small, ethical investors turning on rapacious capitalists. The main movers in the corporate governance movement are often big shareholding institutions such as pension funds.

Traditionally, relations between shareholders and executives have been built upon a degree of trust, reflecting their common interest in maximising profits. But in the 1990s, this trust seems to have gone, and the insecure 'business community' has often appeared to be at war with itself.

Under pressure from the investors, the CEOs of Compaq, American Express, Digital Equipment Corp, General Motors, IBM, Kodak, Sears, Tenneco, Time Warner and Westinghouse have all been forced to resign or have been severely restrained in what they can do. In the summer of 1998, shareholders of Sallie Mae, the student loan company, ousted its top management, even though its stock had tripled in two years. Institutional investors, like the California Public Employees Retirement System and the teachers' pension fund TIAA-CREF, have developed new codes of best practice. These include demands for greater independence of directors from management (they should have no previous or current ties to the company), and for banning 'interlocking directorships' (sitting on each others' boards - that is, the old boys' network). Shareholder proposals at annual meetings have recently declined, but only because more executives are throwing in the towel and capitulating to shareholders' demands without any need for a public battle.

The corporate governance movement claims that it seeks higher levels of company performance, but it is not about encouraging economic growth or increasing investors' returns. Very little time is spent arguing over the need for greater research and development spending. Instead the spending shareholders are obsessed with is the relatively small investment that companies make in executive pay packages.

The focus on executive pay packages reflects a profound mistrust of top management. After years of stable working relationships, shareholder groups now seem to believe that executives, left to their own devices, will build empires, slacken off work, engineer high rewards for themselves, or worse. Instead of letting the managers manage, shareholders now assume it is their job to monitor executive behaviour.

The depth of shareholder mistrust is well illustrated by the criticisms of Walt Disney and its CEO Michael Eisner. In recent years, Disney's financial performance has been among the best in American industry, making its shareholders much wealthier. Despite this, Disney's board has been named the worst in America by a Business Week survey, and Eisner has become the target of prominent shareholder campaigns, all because, they claim, he has stacked the board with his cronies, and arranged to be paid hundreds of millions in stock options.

Investor activism, which once would have focused on improving a poor financial performance, now extends to all companies, irrespective of their performance. No matter how much profit Heinz, Walt Disney or other companies make, the shareholder activists will hound them if they do not comply with their new ethical codes of conduct.

The American economist Milton Friedman once said that the only ethical obligation of a corporation is to maximise profits (albeit within the rule of law). How long would he have lasted in today's ethical corporations, bowing under the iron rule of shareholders who often seem more preoccupied with right and wrong than profit and loss?

James Malone