Business Ethics Simplified

June 29, 2007

In this day and age of Sarbanes-Oxley internal controls, SAS 70 certifications, and myriad other regulatory, compliance, and audit issues that I won't get into , business ethics might seem to be a lengthy and complex topic.

In reality, it isn't. Back in the dark ages when I strolled the halls of SMU, a crusty Econ 101 professor named Jack Stieber proclaimed that there is only one ethical mandate in business: "Within the bounds of the law, maximize profit." There are no more ethical rules necessary to follow in business.

I have heard others phrase a similar thought as "maximizing shareholder value". I disagree with that approach because there are things that management can do to influence the stock price that aren't necessarily tied to maximizing profit. Basically, if you can maximize profit, the stock price will take care of itself.

In response to Prof Strieber's proclamation, there were a few students who responded, "But sir, what about ?" and Prof. Stieber shot them all down. Here is one of the more interesting objections:

"But sir, what about a business owner who hikes the price of bottled water to a ridiculous level in a disaster-stricken area that has lost its water supply? Are you saying he's being ethical by maximizing his profit from price gouging?" Prof. Stieber responded something like this:

Assuming that his pricing policy is legal, he's still being unethical because he's actually not maximizing his profit. Sure, he may reap a short-term gain but when the water supply is back on, those forced to buy his extortion-priced water will take their business elsewhere. So in the long term, he hasn't maximized his profit and thus has behaved unethically. An ethical decision during that time might have been to keep selling water at the pre-disaster price or maybe even donating some to build goodwill among his customer base. This could have cemented a long term relationship with the customers who would provide repeat business again and again and thus maximize his profit over time.

That being said, when a business maximizes it's profit within the bounds of the law, it's a "win-win" for the customers, stakeholders, and shareholders. In my next post, I'll explain how SoftLayer earning profit is a win-win for both the customers and the company.

-Gary

Comments

June 29th, 2007 at 2:38pm

That quote reminds me of discussions I get in with my wife, essentially about how much you can analyze something until an event looks good or bad from a pure "maximizing my benefit" standpoint. Utilitarianism is fun to play around with.

July 6th, 2007 at 4:56pm

The funny thing is that you can remove any legal claims to pricing as well: If you are upfront and not defrauding someone, how can a price go against the law when someone is willing to pay it?

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Comments

June 29th, 2007 at 2:38pm

That quote reminds me of discussions I get in with my wife, essentially about how much you can analyze something until an event looks good or bad from a pure "maximizing my benefit" standpoint. Utilitarianism is fun to play around with.

July 6th, 2007 at 4:56pm

The funny thing is that you can remove any legal claims to pricing as well: If you are upfront and not defrauding someone, how can a price go against the law when someone is willing to pay it?

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