Ethics in the workplace: why bad business is bad for business

Focusing on just profit and loss makes the business environment worse for all concerned

Business schools inculcate an attitude that there is little more imporant than keeping your profits high and your losses low. Maximising shareholder value is the name of the game, and pesky corporate ethics - and even the law, if you think you can get away with it - must be jettisoned if they get in the way. But this isn't just bad for society; it may harm the very foundation on which economics rest.

Although ethics courses are taught in business schools, a recent Bloomberg op-ed by University of Chicago Business School professor Luigi Zingales points out that they are treated very much as secondary subjects, tought by low-ranking professors, perpetuating the idea "that ethics are only for those students who aren’t smart enough to avoid getting caught."

And it gets worse. The overwhelming push to view everything in cold monetary terms leaks into other courses where it is absolutely inappropriate. Zingales writes of a collegue, Gary Becker, who teaches the economics of crime. Comparing the expected value of success to the cost of punishment multiplied by the chance of being caught results in many crimes looking like quite good uses of your time (although not bank robbery, which, a recent paper in Significance magazine showed, only pays around £12,000 while resulting in jail in around a fifth of attempts). But Becker's students took that descriptive model as prescriptive: "They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity," writes Zingales.

It's not hard to see the direct link between the prevailing attitude at business schools and the recent actions of HSBC, which just admitted in a Senate hearing to transporting $7bn from Mexico to the US, ignoring "red flags that the volume of dollars included proceeds from illegal drug sales in the United States". HSBC clearly took a view of the potential profit and loss that could be made by weakening their adherence to money laundering regulations, and decided that the trade-off was worth it, without taking into account the broader societal reasons why those regulations are a good idea.

But even if they decide that it's not the best idea to act criminally, it's still problematic if we have a class of high-powered business people who think that ethics is for weaklings. Focusing too hard on the black and white difference between illegality and legality erodes all the shades of grey between "things you should do" and "things you shouldn't do". You aren't allowed to use slave labour to build your products in Britain, but is that really the only reason you shouldn't? That line of thinking often results in desperate attempts to prove that things which are undesirable are also unprofitable, leading to arguments that slavery is unprofitable, or BP would make more money if they stopped drilling up oil. Those things may or may not be true, but do we really want to base our prescription of how business should behave on changeable facts? If it suddenly became profitable to own slaves – say we find a really good way of making Battle Royale-style control collars – does that make it OK?

The fact is, the general undercurrent of ethics that we all live our lives by does extend to businesses. Any one of us could, if we wanted, steal from a hundred unattended coats, bags and desks every day, but we don't. Nor do we only keep promises when we have signed contracts, or only tell the truth if there is regulation making us do so. Similarly, many businesses have ample opportunities to, both legally and illegally, increase their profit. You can hold off paying invoices until you are served notice, encourage interns to work for free – or pay to work – and just generally be nasty. And while some don't take them, a growing number do.

A survey from "whistleblower law firm" Labaton Sucharow showed that 24 per cent of senior executives in US and UK finance said they believed "financial services professionals may need to engage in unethical or illegal conduct to be successful". We can safely assume that the number who believe that they need to engage in unethical but not illegal conduct is higher still.

But if you end up with a business system where a large proportion of people are acting unethically, then things slowly fall apart. Everyone starts lawyering up, as "verbal contracts" and "gentlemen's agreements" are replaced with real contracts exhastatively negotiated. What were ethical obligations become legal obligations, and where the legal system can adapt fast enough, it jettisons the parts that are holding it back.

Take, for example, the "charity tax". The idea of using the tax system to reward philanthropy is something which, on the surface, makes sense. But then individuals who believe that they have a moral obligation to pay as little tax take advantage of it, the charities commission is forced to crack down on "fake charities" and eventually, pressure hits the government to remove the exemption.

The same pattern happens time and again. The safe-harbour exemption in copyright law is there to enable sites with user-generated content to exist; but it gets abused to justify wilful piracy, and SOPA is introduced in an attempt to remove it. "Carried interest" allows American investors to not pay full income tax on capital gains, but hedge fund managers abuse it to pay themselves tax free, and the "Buffet rule" is suggested. And the BBA allows banks to self-report their rate of borrowing, until Barclays mis-reports their rates for financial gain and ideas for post-Libor regulation involve billion-dollar mandatory loans.

Bad business is bad for business. In the long run, either they tighten up, or they force the law to do it for them.

J.S. Mill, ethicist and philosopher. Could businesses learn from him? Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Ken Livingstone says publicly what many are saying privately: tomorrow belongs to John McDonnell

The Shadow Chancellor has emerged as a frontrunner should another Labour leadership election happen. 

“It would be John.” Ken Livingstone, one of Jeremy Corbyn’s most vocal allies in the media, has said publicly what many are saying privately: if something does happen to Corbyn, or should he choose to step down, place your bets on John McDonnell. Livingstone, speaking to Russia Today, said that if Corbyn were "pushed under a bus", John McDonnell, the shadow chancellor, would be the preferred candidate to replace him.

Even among the Labour leader’s allies, speculation is rife as to if the Islington North MP will lead the party into the 2020 election. Corbyn would be 71 in 2020 – the oldest candidate for Prime Minister since Clement Attlee lost the 1955 election aged 72.

While Corbyn is said to be enjoying the role at present, he still resents the intrusion of much of the press and dislikes many of the duties of the party leader. McDonnell, however, has impressed even some critics with his increasingly polished TV performances and has wowed a few sceptical donors. One big donor, who was thinking of pulling their money, confided that a one-on-one chat with the shadow chancellor had left them feeling much happier than a similar chat with Ed Miliband.

The issue of the succession is widely discussed on the left. For many, having waited decades to achieve a position of power, pinning their hopes on the health of one man would be unforgivably foolish. One historically-minded trade union official points out that Hugh Gaitskell, at 56, and John Smith, at 55, were 10 and 11 years younger than Corbyn when they died. In 1994, the right was ready and had two natural successors in the shape of Tony Blair and Gordon Brown in place. In 1963, the right was unprepared and lost the leadership to Harold Wilson, from the party's centre. "If something happens, or he just decides to call it a day, [we have to make sure] it will be '94 not '63," they observed.

While McDonnell is just two years younger than Corbyn, his closest ally in politics and a close personal friend, he is seen by some as considerably more vigorous. His increasingly frequent outings on television have seen him emerge as one of the most adept media performers from the Labour left, and he has won internal plaudits for his recent tussles with George Osborne over the tax bill.

The left’s hopes of securing a non-Corbyn candidate on the ballot have been boosted in recent weeks. The parliamentary Labour party’s successful attempt to boot Steve Rotheram off the party’s ruling NEC, while superficially a victory for the party’s Corbynsceptics, revealed that the numbers are still there for a candidate of the left to make the ballot. 30 MPs voted to keep Rotheram in place, with many MPs from the left of the party, including McDonnell, Corbyn, Diane Abbott and John Trickett, abstaining.

The ballot threshold has risen due to a little-noticed rule change, agreed over the summer, to give members of the European Parliament equal rights with members of the Westminster Parliament. However, Labour’s MEPs are more leftwing, on the whole, than the party in Westminster . In addition, party members vote on the order that Labour MEPs appear on the party list, increasing (or decreasing) their chances of being re-elected, making them more likely to be susceptible to an organised campaign to secure a place for a leftwinger on the ballot.

That makes it – in the views of many key players – incredibly likely that the necessary 51 nominations to secure a place on the ballot are well within reach for the left, particularly if by-election selections in Ogmore, where the sitting MP, is standing down to run for the Welsh Assembly, and Sheffield Brightside, where Harry Harpham has died, return candidates from the party’s left.

McDonnell’s rivals on the left of the party are believed to have fallen short for one reason or another. Clive Lewis, who many party activists believe could provide Corbynism without the historical baggage of the man himself, is unlikely to be able to secure the nominations necessary to make the ballot.

Any left candidate’s route to the ballot paper runs through the 2015 intake, who are on the whole more leftwing than their predecessors. But Lewis has alienated many of his potential allies, with his antics in the 2015 intake’s WhatsApp group a sore point for many. “He has brought too much politics into it,” complained one MP who is also on the left of the party. (The group is usually used for blowing off steam and arranging social events.)

Lisa Nandy, who is from the soft left rather than the left of the party, is widely believed to be in the running also, despite her ruling out any leadership ambitions in a recent interview with the New Statesman.However, she would represent a break from the Corbynite approach, albeit a more leftwing one than Dan Jarvis or Hilary Benn.

Local party chairs in no doubt that the shadow chancellor is profiling should another leadership election arise. One constituency chair noted to the New Statesman that: “you could tell who was going for it [last time], because they were desperate to speak [at events]”. Tom Watson, Caroline Flint, Chuka Umunna, Yvette Cooper, Andy Burnham and Liz Kendall all visited local parties across the country in preparation for their election bids in 2015.

Now, speaking to local party activists, four names are mentioned more than any other: Dan Jarvis, currently on the backbenches, but in whom the hopes – and the donations – of many who are disillusioned by the current leadership are invested, Gloria De Piero, who is touring the country as part of the party’s voter registration drive, her close ally Jon Ashworth, and John McDonnell.

Another close ally of Corbyn and McDonnell, who worked closely on the leadership election, is in no doubt that the shadow chancellor is gearing up for a run should the need arise.  “You remember when that nice Mr Watson went touring the country? Well, pay attention to John’s movements.”

As for his chances of success, McDonnell may well be even more popular among members than Corbyn himself. He is regularly at or near the top of LabourList's shadow cabinet rankings, and is frequently praised by members. Should he be able to secure the nominations to get on the ballot, an even bigger victory than that secured by Corbyn in September is not out of the question.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.