PUTTING PROFIT IN ITS PLACE

Marvin T. Brown, Ph.D.

Where does profit belong in business ethics?  Does it have a normative role in evaluating business conduct; that is to say, can an increase in profit serve as a justification of any specific business conduct?  If so, when should one apply the profit standard?  In other words, where is the “place” of profit in a normative business ethic?

The notion of profit often appears in discussions of a business’ purpose, but the notion of purpose in these discussions is usually more descriptive than normative.  To see whether or not profit belongs to a business’ purpose, from an ethical perspective, we will need to construct a normative view of purpose.  Achieving one’s purpose, however, is only one of several elements of business conduct, Perhaps profit does not belong to an ethics of purpose at all, but rather somewhere else.  To explore these possibilities, we need to describe the key elements of business conduct and to develop an ethical framework that includes enough criteria to evaluate all of them. Then we will see how these criteria can be used to analyze a particular case, which will show the advantages of putting profit in its appropriate place.

A Comprehensive Business Ethic and the Elements of Human Conduct

Although there are several approaches to business ethics, I am assuming in this paper that business conduct can be analyzed much as we analyze human conduct.  Businesses, like human beings, can be seen as agents who make decisions (French, 1984, Brown, 1990).  There are also significant differences between businesses and human beings.  Businesses, for example, do not have individual motives or desires.  They are structured collectives and communities.  These differences, however, do not prevent us from evaluating “business conduct.” 

If we accept these assumptions about businesses, then a comprehensive business ethic would need a framework that includes the main elements of human conduct.  And what are these elements?  The dramatistic model of human action developed by Kenneth Burke provides a set of terms that are applicable to both individuals and businesses (Burke, 1969).  To understand the meaning of an action, he suggests we need to know where and when it occurred, who did it, what was done, how it was done, and why.  Burke called these five elements of action: scene, agent, act, agency, and purpose.  Following Burke, we can say business conduct involves a context or situation (scene) wherein individuals or groups (agents and co-agents) make decisions (act and agency) for some goal (purpose).  If we take these as the key elements of business conduct, then an adequate ethical framework needs to cover all five of them. To evaluate business conduct, in others words, we will have to ask several questions instead of just one.  We will also need several normative criteria.  We will need enough normative criteria to bring each of the five elements of conduct under a normative evaluation. Many current approaches in business ethics, unfortunately, omit the notion of an agent’s purpose.

Some Current Business Ethical Theories

Most discussions of ethical theory in business ethics begin with two approaches, deontology and utilitarianism, and then add on more recent approaches, such as an ethics of care, of responsibility, or of contract.  None of these approaches, or their recent additions, analyze an agent’s purpose.  A few recent articles in ethical theory have argued for the importance of considering goals or purposes (Enderle, 1996; Collier, 1998).  These articles, however, have not addressed the question of where profit fits in a comprehensive business ethic.  Still, they move in a similar direction as this essay. 

In spite of these exceptions, in most cases, one finds ethical approaches that cover four elements of Burke’s pentad quite well, but the agent’s purpose remains beyond ethical analysis.  Velasquez (1998), for example, develops the normative criteria of utility, rights, and justice.  None of these three consider the purpose of the agent. Utility, or the evaluation of consequences, examines “how” an “act” impacts the “scene,” or situation.  The criteria of rights and justice allow us to evaluate the treatment of agents and co-agents.  Lacking an explicit normative analysis of purpose, Velasquez’s approach allows one to assume that a purpose of business is to make a profit.  He writes, for example, that “ethical considerations are consistent with business pursuits, in particular the pursuit of profit” (p. 39).  To explore this assumption, we need to make a distinction between normative and descriptive views of a business’ purpose.

Normative Ethics and Profit

To say that business “pursue profit” may describe a common understanding of the purpose of business.  Many businesses are managed today to maximize profits.  As Pfeffer has observed, financial departments have increased their power in organizations since the 1960’s (1994).  Many of us have witnessed the increasing dominance of financial perspectives in all our institutions.  Still, even from a purely descriptive perspective, many businesses see themselves as having other purposes than the pursuit of profit.  Aguilar’s Managing Corporate Ethics (1994) is just one of several reports on companies that are not guided simply by maximization of profit.  Many company statements, such as Johnson & Johnson’s Credo, also attempt to convey a different corporate image than one dominated by the bottom line.  The legal framework of business in the United States also suggests that profit does not define a business’ purpose.  If one applies for a business license in the United States, the prospective businessperson must say what she intends to do. This is also true for establishing a corporation.  The state does not issue business licenses to those whose only aim is to “pursue profit.”  Licenses are given for providing some product or service.  The permission to “run” a business, in other words, rests on the assumption that it will make some contribution to society.  This requirement refers to the business, not to the person wanting to start a business.  A person may well enter into business to gain wealth, or to create life saving drugs.  The individual’s motive, however, does not determine the purpose of the business itself.

From a normative perspective, profit could only serve as the purpose of business if it could qualify as an ethical standard.  If it could, then any activity that increased profit would be the right thing to do.  There are, however, obviously profit making adventures that most people think are morally wrong.  Suppose we heard of a group of entrepreneurs, who make a bundle of money. Does that alone give us any idea about the value of their activity?  I doubt it.  Does the change in status from “non-profit” to “for-profit” change the “purpose” of an organization?  We have witnessed community and “non-profit” hospitals changing to “for-profit” hospitals.  Does that mean that their purpose has changed?  If their purpose before was to provide quality care for community members, do they have a different purpose now?  Does not the purpose remain the same?

Say you are considering going on a vacation with a travel agency.  You could choose either a non-profit agency, such as a museum, or a for-profit agency.  Which one would you choose?  Would you not choose the one that provides the best service or you or for your group?  Asking such questions may seem like the consumer is the one who decides a business’ purpose.  That is not quite accurate.  To further develop the possibility of a normative understanding of a business’ purpose, we will need to rescue teleology form its current entrapment in consequentialism.

Teleology and Utilitarianism

Some might argue that it is unnecessary to develop a teleology because it has been replaced by utilitarianism.  We need to look at this argument.  It does seem to be a common practice to see both teleology and utilitarianism as forms of consequentialism.

Theories about consequences are frequently labeled teleological, a term derived from the Greek word telos, which means “end” or “purpose.”  According to consequential theories, the concepts of right, wrong, and duty are subordinated to the concept of the end or purpose of an action. (1996, p. 3)

They continue by distinguishing two types of consequentialists: egoists, who are concerned only with what “maximizes my good,” and utilitarians, who are concerned with maximizing good for the entire human community.  The text then considers only the tradition of modern utilitarianism, as though it were the only respectable form of teleology. 

This substitution of utilitarianism for teleology is common in much contemporary ethical theory.  Edel, et al. (1994), in their recent book on applied ethics, show us how this has happened.  They write that, in addition to deontology,

The other great family of ethical theories is the teleological, and here the teleologist par excellence is Jeremy Bentham and the paradigmatic teleological theory is Utilitarianism, of which Bentham is considered the modern founder. (p. 40)

If naming Betham a teleologist is not confusing enough, the authors supply the following footnote:

The word [teleology] derives, as does deontology, from the Greek, in

this case, telos, meaning goal, end, or purpose.  Prior to the utilitarians, Aristotle would have been the primary example of a teleologist.  For Aristotle, though, telos is couched in a theory of development according to which each species, including the human, has built into its nature some ideal of maturity toward which it “naturally” tends (p. 255).

So what is the relationship between utilitarianism and teleology?  Is it wise to call Bentham a teleologist?  If we compare the language of Aristotle and Bentham, we see that one key difference between them is the difference between thinking about purposes and thinking about consequences or results.  These different ways of thinking have become somewhat muddled.

An agent’s purpose is to fulfill its potential, which is defined by its characteristic action or identity.  The process of achieving the purpose is also a process of becoming a certain type of agent.  The character of the agent, in other words, comes into being through the realization of its purpose.  This is not necessarily true in bringing about results.  In a broad sense, teleological thinking is thinking in terms of parts and wholes.  The actions (parts) belong to the purpose (wholes).  Utilitarian thinking, on the other hand, is thinking in terms of comparison and contrast.  Which alternative course of action, A or B, will maximize X, whatever X happens to be?

We do sometimes speak of an action’s or policy’s purpose, such as the purpose of federal affirmative action programs.  But this is really a personification of a policy.  If we want to be more precise, we need to say that affirmative action is a means for achieving the purposes of various agents in the United States federal government.  Affirmative action also, of course, has certain results.  It has had a variety of effects on society, which can be seen as the policy’s consequences.

To see the significance of the distinction between the purpose and the consequences of a policy, let us look at affirmative action from each ethical approach.  A utilitarian approach would analyze the probable results or consequences of continuing or not continuing the program, on all the groups impacted by the policy.  Whatever produces the greatest good for the greatest number will be the right thing to do.

A teleologist approach begins with selecting an agent.  Whose policy is this?  Well, it’s the government’s.  And what is the purpose of government?  This question might lead us to different political theories, to the Constitution and the Bill of Rights, and to different views of the role of government in creating and maintaining a civic community.  If affirmative action promotes these “ends” then we should continue it. 

These two discussions are not opposed to each other.  The best decision will be one that both brings about the best results for all concerned and promotes the government’s ends as a particular institution.  It will also be one that does not violate certain ethical principles, which can be developed by applying an ethics of principle.  Such principles would center around concepts of rights and justice.  We need all three approaches to develop a comprehensive approach to affirmative action.  Perhaps, as Robert Goodin (1995) has argued, utilitarianism is a more appropriate theory for public policy issues than deontology.  In a democracy, public policy should consider the overall impact of a policy upon all its citizens.  Still, how any particular institution goes about managing these consequences will depend on what kind of institution it is; that is, on its purpose in our society. To further develop a conceptual framework for analyzing an institution’s purpose, we can return to Aristotle’s ethics.

Aristotle’s Teleology

In the context of exploring what is the “good” for human beings, Aristotle writes:

For just as the goodness and performance of a flute player, a sculptor, or any kind of expert, and generally of anyone who fulfills some function or performs some action, are thought to reside in his proper function, so the goodness and performance of man would seen to reside in whatever is his proper function.  Is it then possible that while a carpenter and a shoemaker have their own proper functions and spheres of action, man as man has none, but was left by nature a good-for-nothing without a function? (Book I. 16.25-28)

The question is a rhetorical one.  He believes that human beings have a function too:  “The proper function of man, then, consists in the activity of the soul in conformity with a rational principle, or at least not without it.”(Book I.17.7)  This “proper function” is also the “end” or purpose of human beings (Reeve, 1995)

It seems to me that the notion of function provides a language to ask about the purpose of social institutions, including businesses.  If the function of the ship builder is to build good ships, or the flutist to play the flute well, as Aristotle suggests, then surely we can also ask about the social function of a particular business.  Our answer may not be the same as Aristotle’s, but our question sounds quite similar.  We can answer Aristotle’s rhetorical question, “But are you good-for-nothing?” by looking at what a business is designed to do well.

Applying an Ethics of Purpose to a Particular Case

The importance of an institution’s particular function or purpose in society can be seen by looking at a case, developed by Ferrell & Fraedrich, about employees in an accounting firm not reporting all their hours, so they could make their work group look good (1994 p. 94).  Should this practice be continued?  If we apply an ethics of purpose, we need to ask about the function of accounting firms in our society.  An article in the New York Times that lamented the decreasing number of accounting students, stated the accountant’s function as the “watchdogs for millions of investors” who work to  “give an independent expert opinion on whether management’s numbers are trustworthy” (Feb. 19, 1999, p. C2).  Their work of examining corporate financial statements serves as the basis for investment decisions.  As John Bogle, founder of the mutual fund company, the Vanguard Group, says, “It is full disclosure and accurate financial statements that are the basis for our capital market system.”  Given this function in society, we can then ask if “eating time” inhibits or promotes it.  The “virtue” that seems to fit best here is integrity, since integrity examines the alignment or fit between purpose and practices.  Does it not seem clear that keeping inaccurate records within an accounting company could easily compromise its purpose of making sure that its clients are not doing the same?

Although other types of ethical analysis might support the same conclusion, they would do so for different reasons.  An ethics of principle, would wonder if the implicit principle in this practice could become a universal moral law.  Misrepresentation of time sheets, of course, cannot be universalized.  An ethic of consequence would examine the probable consequences of continuing this practice and of not continuing it.  Depending on the groups included in the analysis, it could probably go either way.  If the analysis did show that the potential costs of their practice outweighed the benefits, it would add credence to the other two approaches.

An ethics of consequence may discover that if one accounting company stops this practice while others continue it, then the “ethical company” might be harmed.  Their clients might abandon them for other accounting firms that billed fewer hours.  Examining the profitability of not eating time might make this very clear.  If these consequences seem likely, then the firm would want to reconsider its course of action.  Is there a way to fulfill its purpose in society and to avoid negative consequences?  In this case, there may be.  Instead of thinking about what this firm should do or not do, a firm could think about what kinds of policies should be set for all the accounting firms.  It could also consider government regulation that would ensure that all firms held to the same standards of conduct.  In either case, the development of some form of joint action may be the only way that a particular accounting firm can fulfill its own function in society and remain responsible for the management of consequences of doing so. Although there are other consequences besides the increase or decrease of profit for the firm, this consequence does seem to offer a place of profit in business ethics—as an element of a utilitarian analysis of any proposed action.

The way most people talk about profit seems to support this view.  The notion of the maximization of profit, for example, seeks more rather than less.  It merely translates the results of actions and practices into profits and losses, instead of into pleasures and pains.  Cost-benefit analysis, as many text books indicate, is a form of utilitarian thinking.  The Ford Pinto case is still used as an example of this type of thinking gone astray (Newton & Schmidt, 1996).  The utilitarianism used in this case, however, comes closer to what Werhane and Donaldson have called “egoistic” utilitarianism than the utilitarianism suggested by Betham and Mill, which is concerned with the overall good for the whole community.

Removing profit from the analysis of a business’ purpose and moving (returning) it to the analysis of consequences, creates some significant opportunities.  We can use a normative notion of purpose to evaluate organizational practices, such as the analysis of the accountant’s case illustrated.  Placing profit into the mix of different consequences allows us to consider the costs and benefits of different decisions.  This allows us to think about the relationship between the maximization of profit and the management of consequences.

The argument that profit should be understood in terms of the management of consequences finds support from an unexpected source; namely, Milton Freedman’s essay, “The Only Social Responsibility of Business is to Make a Profit.” (1970).  Although it is easy to interpret Friedman’s argument as one about the purpose of business, a closer reading reveals that he does not mention purpose, but rather considers the responsibility of business, or more specifically, the responsibility of the executive or corporate manager.  He supports his argument that profit is the “only” responsibility of business by appealing to principle and to consequence.  The principle is that of promise-keeping.  The executive serves as the agent of the owner or principle, and has a responsibility to do what the owner wants--profit.  This argument assumes that profit belongs to the owner of a business.  This is true of small businesses, such as mom and pop stores.  Corporate profits, on the other hand, belong to the corporation.  In business law, “One of a corporation’s unique features stems from its separateness from the people who own it.  That is, a corporation exists in its own right as a legal person distinct from the shareholders.” (Davidson, 1987, p.836)  Since profits belong to the corporation instead of the owners, managers do not have a obligation to give the profits to the owners or investors.  They do have the responsibility, however, to distribute them fairly corporate profits.  They will usually distribute some to R&D, some to company expansion, some to training, and some as dividends to investors.  This decision will usually be guided by utilitarian calculation.  “How can we get the most bang out of a buck.”  One could also imagine an application of distributive justice to insure that the distribution is fair.

Friedman’s other argument to support his view relies on the analysis of consequences.  He examines the consequences of the executive “spending the stockholders’ or customers’ or employees’ money.”  One consequence is that persons with no expertise in various sectors of society will be able to influence these sectors through gifts and donations.  Another consequence for the executive is that he or she might get fired.  Although Friedman does not engage in a “moral calculus,” which wouldconsider the impact of all affected groups, he does make a suggestive link between the responsible management of consequences and profit.

Responsibility and Profit

The term responsibility has a variety of meanings.  As we just saw, Friedman uses it in terms of promise keeping, and in terms of managing consequences.  It is this second use that is germane here. This was also Max Weber’s understanding of responsibility (1946).  In his essay, “politics as a vocation,” he argues for a public “ethic of responsibility.”  This ethic, in contrast to an ethic of ultimate ends, considers the consequences of action.

Profit has two different roles in regard to the responsible management of consequences.  Profit can be seen as a measurement of effective management.  The maximization of profit can be seen as a call for efficiency, for the best use of resources, and for the elimination of waste.  It promotes a kind of stewardship.  In this sense, the maximization of profit refers not to what one should do (purpose), but how one should go about getting it done.  Such calculations seem to fit Aristotle’s model of decision making.

Profit’s second role is as a surplus that the corporation gains from its activities.  The responsible management of consequences raises the question: “Where does this profit come from?  This question opens an inquiry into the positive and negative consequences for the various groups and environment impacted by corporate practices.  Stakeholder theory can help us pursue this question.

As with Friedman’s argument, stakeholder theory relies on both an ethics of principle and an ethics of consequence (Freeman, 1994).  The ethics of principle is that people deserve respect.  They ought to be treated, as Freeman says, following Kant, not only as means but also as ends.  Following this principle, a utilitarian analysis examines the impact of corporate decisions on different “stakeholders.”  In contrast to Friedman’s view that only considers one stakeholder--the stockholders--this view takes responsibility for corporate impact on all stakeholders--investors, management, local community, customers, employees, and suppliers.  One might, in some circumstances, add other stakeholders, such as future generations.  In any case, what groups would be involved would depend on an analysis of the potential impact of a corporate decision.  From the perspective of a stakeholder theory, corporate profits would be a surplus that was not gained at someone else’s expense, but rather was gained by an increase in prosperity for all.  The maximization of profits, in other words, would be evaluated by its impact upon all relevant groups.

One might be tempted to develop a stakeholder theory so that it would replace both an ethics of principle and an ethic of purpose.  Then a business becomes merely a platform for the negotiation of different stakeholder claims.  This proposal, however, seems to take the purpose of a business for granted.  It leaves unanswered the question, “Why this particular business in this particular society?”  If one does not answer this question, how can a business select the relevant stakeholders for consideration?   In other words, without a strong mission statement, how can a business know what it is supposed to pursue?

Conclusion

Profit does not have to be an opponent of business ethics.  We do not have to be confined by the false dilemma of “people or profit.”  We do need to put profit in its place, in an ethical framework that encompasses the key elements of human action.  In order to accomplish this, we need to develop an ethics of purpose, or teleology, that allows us to analyze corporate activities in terms of their normative function in society.  This function may change as society changes, but if a business becomes good-for-nothing, why should it exist?  The tobacco industry today is facing just this problem.  At the same time, business decision makers need more than an ethic of purpose.  They also need to explore relevant principles and probable consequences.  If we remember that businesses, like most of us, should eat to live, rather than live to eat, then the place of profit in a comprehensive ethic will be less of a mystery.

BIBLIOGRAPHY

Aguilar, F. J.  (1994) Managing Corporate Ethics: Learning from America’s Ethical Companies How to Supercharge Business Performance.  New York: Oxford.

Aristotle.  (1992)Nicomachean Ethics. The Library of Liberal Arts. Trans. M. Ostwald, Englewood Cliffs, NJ: Prentice Hall.

Brown, M. T.  (1990) Working Ethics: Strategies for Decision Making and Organizational Responsibility. San Francisco, CA: Jossey-Bass.

____. (1998) The Ethical Process: An Approach to Controversial Issues. Upper Saddle River, NJ: Prentice-Hall.

Burke, K.  (1969) A Grammar of Motives. Berkeley and Los Angeles: University of California Press.

Collier, J. (1998) “Theorizing the Ethical Organization.” Business Ethics Quarterly 8 (October): 621-654.

Davidson, D. et al. (1987) Comprehensive Business Law: Principles and Cases. Boston, MA: Kent Publishing Company.

Donaldson, T. and Werhane, P. 1996 Ethical Issues in Business: A Philosophical Approach. fifth edition. Upper Saddle River, NJ: Prentice Hall.

Edel, A., Flower,  E., and O’Connor, F. (1994) Critique of Applied Ethics: Reflections & Recommendations. Philadelphia: Temple University Press.

Enderle, G. (1996) “Towards Business Ethics as an Academic Discipline,” Business Ethics Quarterly 6(1): 43-65.

Freeman, R.E. (1997) “A Stakeholder Theory of the Modern Corporation,” in Ethical Theory and Business. Fifth Edition., ed. T. Beauchamp & N. Bowie, Upper Saddle River, NJ.

Ferrell & Fraedrich. (1994) Business Ethics: Ethical Decision Making and Cases. Boston: Houghton Mifflin Company.

French, P.A. (1984) Collective and Corporate Responsibility. New York: Columbia University Press.

Friedman, M. “ (1970) “The Social Responsibility of Business Is to Increase Its Profits.” New York Times Magazine, September 13.

Goodin, R.E. (1995) Utilitarianism as a Public Philosophy. Cambridge University Press.

Hanson, K. (1983) “Ethics and Business: A Progress Resort.” Stanford GSB (Spring): 10-13.

Horvath, C.M. (1995) “Excellence V. Effectiveness,” Business Ethics Quarterly, 5(3): 499-532.

Koehn, D. (1995) “A Role for Virtue Ethics in The Analysis of Business Practice,” Business Ethics Quarterly, 5(3): 534-539..

MacIntyre, A. (1981) After Virtue: A Study in Moral Theory. Notre Dame, Indiana: University of Notre Dame Press.

Meikle, S. (1995) Aristotle’s Economic Thought. Oxford: Clarendon Press.

Newton, L.J. & Schmidt, D.P. (1996) Wake Up Calls: Classiccases in Business Ethics.  Belmont, CA: Wadsworth Publishing Company.

Pfeffer, J. (1992) Managing with Power: Politics and Influence in Organizations. Boston, MA: Harvard Business School Press.

Reeve, C.D.C. (1995) Practices of Reason: Aristotle’s Nicomachean Ethics.  Oxford: Clarendon Press.

Solomon, Robert C. (1992) “Corporate Roles, Personal Virtues: An Aristotelian Approach to Business Ethics.” Business Ethics Quarterly 2(3): 317-339.

Weber, M. (1946) Politics as a Vocation.  Trans. Gerth & Mills, Philadelphia: Fortress Press.