[Paper prepared for and presented at the Inaugural Lecture of the Rafael Escola Chair of Ethics at the School of Engineering of the University of Navarre in San Sebastian, Spain. It is published in Tecnun Journal num. 1 (May 2004). - The recent spate of financial scandals begs for explanation and remediation. Evaluating actions primarily in terms of their consequences, often narrowly defined in terms of efficiency, productivity, or profit, is one source of the problem. And, current conceptions of economics emphasize the importance of outcomes above all and the primacy of outcomes to shareholders in evaluating results. Therefore, a case can be made that it is consequentialist logic and thinking, produced in part by economic language and assumptions, that have helped create the current situation. Remedying the problem will entail exposing students to alternative models of behavior and emphasizing, in both school and organizations, doing the right things, not simply doing things for the presumably right reasons. In following this path of emphasizing values as well as consequences, there is hope for the professionalization of management.]
#102 ::Varios Categoria-Varios: Etica y Antropologia
by Jeffrey Pfeffer, School of Business, Stanford University, California, U.S.A.
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We have learned a lot in the last several years. We have learned that the use of equity incentives, such as stock options, for CEOs does not ensure that companies will be well managed or that shareholders will benefit from the supposed alignment of their interests with senior executives (e.g., Blasi and Kruse, 2004; Dalton, et al., 2003). On the contrary, many people now believe that options encouraged highly risky behavior and the various corporate scandals that occurred (e.g., Pfeffer, 1998; Morgenson, 2002). We have learned that the unfettered, single-minded pursuit of shareholder value is not necessarily good for companies, their employees, or maybe even for the shareholders (Jacobs, 1991). This lesson, which has both a theoretical and empirical foundation (Aoki, 1988), seems to be repeatedly forgotten. We have learned that CEO tenure is declining (Blumenthal, 2003; Martin, 2000; Radler, 2003), even as CEO pay continues to rise—both absolutely and relative to the pay of others in the organization—and that CEO compensation seems to have only a weak relationship to company performance (e.g., Crystal, 1991; Jensen and Murphy, 1990). We have learned that senior leaders of business organizations, at least in the United States, are now among the least respected people in public opinion surveys (Carroll, 2003), and that the capital markets and business face a crisis of legitimacy that stands in sharp contrast to the situation of a few years ago.
What we have yet to do is to put these various observations together and to figure out how and why this all came about and what might be done about it. In this paper, I want to offer my perspective on what has gone on and why, a perspective informed both by data and by social science theory, and to use this diagnosis to come up with some ideas to make the future both different from and better than the past.
The argument proceeds as follows. One root cause of the wave of corporate scandals and financial misconduct is not simply the primacy of shareholder value as the objective for companies and their leaders, but something even more fundamental: the dominance of a logic that says that organizations and their leaders undertake, and should undertake, actions mostly if not solely for intended consequences defined almost exclusively in economic or efficiency terms. The idea that actions are to evaluated by their consequences is so commonplace as to be almost unexceptionable, being an important premise of behaviorism in social psychology (Skinner, 1969; Luthans and Kreitner, 1985) as well as an assumption of economics, where utility maximization is a basic foundation of the theory (e.g., Kuttner, 1996: 41). But, this consequentialist logic almost necessarily leads to unethical behavior on the part of business school students and corporate leaders. That is so for some simple reasons. It is almost always possible to construct a rationale for doing almost anything if the only metric to be applied to the action is the potential positive consequence for something like shareholder value in the case of corporate leaders or academic success, as measured by graduation or higher grades, in the case of students, and if other concerns such as the appropriateness or moral dimension of the behavior in question are ignored.
Consider two examples to help see the plausibility of the argument. Robert Jaedicke is a former accounting professor and the former associate dean and dean of the Stanford business school. He was also the chairman of the audit committee of Enron and served on the Enron board since the mid-1980s. The question posed by those who know Jaedicke well is how could this ethical, honest, and decent man have been caught up in such a massive financial fraud? There are many possible and plausible answers, including a) the complexity of the transactions that ultimately brought the demise of Enron, b) Jaedicke’s long association with the company and its CEO, Ken Lay, that may have made him complacent and reluctant to challenge a long-time colleague, and c) the fact that responsibility can become diffused when many people are present and observing an action (e.g., Latane and Darley, 1968), in that no single individual may feel particularly responsible or comfortable with disagreeing with the others. But there is another possibility as well. Suppose Enron, with its high stock price, needed to show growing earnings or earnings of a certain amount as expected by analysts in order to maintain and even increase that share price. A transaction is presented with the following possible outcomes: approve the possibly questionable deal and permit the company to continue to report favorable financial results and maintain the stock price, or refuse to approve it and potentially face a calamitous decline in shareholder value. If maintaining shareholder value is the only thing that matters—if it is only the short-term results that count—it is clear that there will be enormous pressures to approve the deal and, in fact, doing so is probably the logical thing to do.
Or consider another example. If students attend school solely to get a better job when they graduate, then what matters is getting in and getting out of the program, not necessarily what they learn or what they do while they are there. With a logic that says school is a means to an end, cheating or otherwise cutting corners will appear more acceptable, compared to a situation where students are in school because of their interest in the subject and their desire to master the material, or to learn a set of values and behaviors that will form a foundation for subsequent conduct. In these latter cases, cutting corners or cheating will be almost inconceivable, since doing so would diminish the students’ enjoyment of and engagement in the material in the first instance and result in their learning the wrong lesson and bad behavior in the second.
This potential downside of doing everything “in order to…” raises an additional question: Where did we learn that the only thing that mattered is outcomes or results, often narrowly conceived in economic or efficiency terms, with less concern for how they are produced or what effects actions may have on other stakeholders? One source, albeit not the only one, for this idea is economic theory with its associated language and assumptions that have come to dominate modern discourse and thinking. So, the argument is that economic language and assumptions produce an emphasis on outcomes narrowly defined, and in turn, this emphasis on consequences creates an environment in which cutting corners, cheating, and unethical behavior—because the ends justify what means are required—becomes more likely. Because business schools are increasingly dominated by economics, the education of business school students may be as much a part of the problem as the solution. And because modern management has adopted both the language and the principles of economics to the exclusion of alternative perspectives, management is hampered in becoming a true profession, where professionalization is defined, in part, by the requirement to act in the best interests of others, such as clients, not solely for one’s own gain (Khurana, Nohria, and Penrice, 2004).
This line of argument has implications for how we educate students and for how we think about the management process. The most important implication is an idea that is not new—that values matter, not just for abstract discussions of philosophy and education, but for the management of organizations as well. Only if and when we become comfortable and committed to building organizations anchored in fundamental human values will the potential ill effects of consequentialist thinking be diminished.
WHAT IS WRONG WITH THINKING JUST IN TERMS OF CONSEQUENCES
Perhaps the best place to describe what the logic of consequences is and what’s wrong with it is to look at one reaction to some of my own writing. Some years ago I wrote a book entitled The Human Equation: Building Profits by Putting People First (Pfeffer, 1998). In that book, I made the argument that there were a set of high performance or high commitment work practices that were both good for profits and good for people—that the interests of people (or labor) and the interests of companies (or capital) were not inexorably or inevitably in opposition, as various labor process theories had maintained (e.g., Parker and Slaughter, 1988; Graham, 1995; Marchington and Grugulis, 2000). For instance, providing people with information about the company and its operations and strategy—open book management (e.g., Davis, 1997; Case, 1995; Stack, 1994)—and letting people make decisions using that information in a decentralized structure, was good for people as it encouraged them to learn and develop new competencies and also permitted them to actually use their gifts and skills in their work life, thereby becoming more self-actualized on the job. These practices of information sharing and decentralization were also good for companies (e.g., Levine and Tyson, 1990). Decentralized decision making and information sharing enlisted discretionary effort on the part of people who were more likely to feel engaged in and committed to an enterprise where they had some say in what occurred and were trusted with data and treated like responsible adults, and also permitted the organization to access and use the knowledge of front-line employees who frequently accumulated vast amounts of tacit knowledge from their years of experience.
One of the companies that actually practiced a very decentralized style of management with lots of information sharing was the large independent power produced AES (O’Reilly and Pfeffer, 2000: Ch. 7). The CEO at the time, Dennis Bakke, came to Stanford and talked about the company and its operations and values. Although Dennis agreed with many of the points about the connections between management practices and economic results, he did not like the subtitle of the book, “Building Profits by Putting People First,” at all, because he objected to the link it made between people management and company profitability. His argument was as follows: There are some things that ought to be done not because of their consequences, but because they are simply the right thing to do, regardless of their economic consequences. Because people spent so much of their life at work, had their identities to some extent tied up with their organizational role, and depended for their livelihood on their employer, what happened to them at work was really important. Therefore, treating people with respect and dignity, letting them develop all of their potential and capabilities, providing an environment where they could make decisions, and basing their compensation on the economic success of the organization so they could fully share in that success represented not just some management practices to induce higher productivity, but rather some fundamental principles that should form the basis of people’s relationship with their employers. Bakke argued that if you did something, like encourage people to learn and make decisions, in order to accomplish some business or financial objective, the behavior or management approach would necessarily be contingent or conditional on the ability to demonstrate, and to continue to be able to demonstrate, the connection between that behavior and its business results. Once that connection was no longer evident or came into question, the implementation of a management approach that was so beneficial for people would be in peril.
What Bakke was addressing and critiquing in my writing was the fundamental issue of consequentialist thinking and what he was advocating, at least in some circumstances, is its opposite: the idea that there are basic duties, rights, and obligations—fundamental moral principles—that need to be followed regardless of their consequences (see Bakke, 2005). The idea that there are fundamental rights, duties, and obligations that transcend consequences such as economic efficiency seems to me to be under attack and very much suspect in the contemporary environment. In our schools, particularly business schools, the place that I know best, and particularly in the United States, the country I know best, we are in both subtle and less subtle ways encouraging people to focus on outcomes and results—consequences—and to believe, as a result, that the ends—most frequently economic ends of efficiency and productivity—justify the means.
As one example, consider the case of collective bargaining and unionization in the United States. The proportion of the labor force covered by collective representation has declined from about one-third of the labor force in the 1950s to about 10 percent today (Adams, 1995). Unionization or its opposite, remaining nonunion, is almost invariably discussed in terms of the effects of unions on profits, productivity, and competitiveness, for instance, as affected by union impacts on wage rates (e.g., Freeman and Medoff, 1984). Opposition to unionization, when it does not rest on ideological grounds, is resisted by managers who believe that unionization delimits their discretion in organizing and managing enterprises which must respond quickly to changing competitive conditions (Kochan, Katz, and McKersie, 1986).
What is somehow lost in the debate about union effects on economic efficiency and allocative outcomes is the fact that the right to bargain collectively and the associated right of freedom of association has, for literally decades, been considered to be a fundamental human right (e.g., Adams, 2002). The International Labor Organization, an agency of the United Nations, again in 1998 reiterated something first stated in the 1940s: the responsibility of member states to respect and promote five fundamental human rights. These rights are freedom of association, effective recognition of the right to collective bargaining, the elimination of all forms of forced or compulsory labor (slavery), the abolition of child labor, and the elimination of discrimination in employment (Adams, 2001: 524). If freedom of association and the right to bargain collectively is a fundamental human right, then as such, it takes primacy over considerations such as whether collective bargaining is efficient, or its effects on productivity, or even its effects on national competitiveness (Adams, 1999). In the discussions of the consequences of unions on economic outcomes, we see the reprise of debates about whether child labor and health and safety in the workplace, for instance, should be regulated by the government because of the “costs” of those regulations on employment and competitiveness.
The problems with an approach that emphasizes consequences over rights and social values are many. The likelihood of dishonest behavior is increased, as evidence to be discussed below suggests. But there are other costs as well. As the large literature on intrinsic motivation and insufficient justification argues (e.g., Deci, 1975; Lepper and Greene, 1975), when people do things to achieve some reward or avoid some punishment—when their actions are primarily motivated, in other words, by the anticipation of future extrinsic consequences—intrinsic task motivation and interest goes down. Moreover, there is evidence that at least some people seek meaning and spiritual fulfillment in their work and organizational affiliations (Ashmos and Duchon, 2000; Mitroff and Denton, 1999). To the extent that the ability to achieve fulfillment of these spiritual goals in the work setting get compromised by the demands for achieving specific economic results regardless of the process, the consequence is what we currently observe—less employee loyalty, more turnover, and more efforts to find meaning in other, nonwork aspects of people’s lives.
METRICS FOR ASSESSING MANAGEMENT PRACTICE
There was a time when a stakeholder model (e.g., Freeman, 1984; Jones and Wicks, 1999) of the business corporation was more accepted. The idea was that companies had numerous stakeholder groups, including employees, customers, creditors, and shareholders, and it was the task of senior management to balance the demands of each of these groups. This point of view was not just a normative position on how things should be, it was (and is) also descriptively accurate. Without customers, there is no company. Without employees a company would not be able to provide goods and services to its customers. And, companies need capital, in the form of debt and equity, so investors and creditors are also stakeholders with interests in the well being of the firm. Furthermore, as legal entities chartered by government, many believed that business firms also had a social responsibility to serve, or at least not harm, the larger social and physical environment in which they existed. Organizations require social legitimacy to survive (Pfeffer and Salancik, 1978: 193-202), and therefore need to engage in activities and adopt structures and practices that ensure this legitimacy.
Over time, for numerous reasons that need not concern us here (but see Kuttner, 1996, among others, for a discussion), the stakeholder model has fallen into disfavor and has been replaced by a conception of the business organization in which shareholders are preeminent. Although this movement clearly began in the United States, this idea of shareholder (as contrasted with stakeholder) capitalism is spreading, first to Europe and particularly the United Kingdom, and even to Japan. One argument for the normative goal of maximizing stock price is that this goal serves much like that of profit maximization in other economic models, such that pursuing this goal is consistent with maximizing efficiency (see Kuttner, 1996 for a description of the economic model of maximization and its assumptions). However, as Aoki (1988) has shown, this argument is not invariably true and under some conditions, management decisions that take into account the interests of employees as well as shareholders actually produce better results.
Empirically documenting the shift in the standards and criteria by which corporations are judged and assessing these standards on a comparative, as well as an historical basis, is an important task (see, for instance, Abegglen and Stalk, 1985, for a comparison of priorities in Japanese and U.S. corporations). For the present, we rely on one reasonable proxy, a study that examined what criteria were employed in management studies where some form of performance was the dependent variable. Walsh, Weber, and Margolis’s (2003) empirical study of management research found that interest in some measure of human welfare as an outcome of managerial action peaked in the late 1970s, but that recently very little management research considers anything other than economic performance or some variant of that as a dependent variable. They concluded that “the public interest…holds a tenuous place in management scholarship” (Walsh, et al, 2003: 860), and it seems reasonable to argue that this emphasis in management scholarship reflects broader trends in the larger society.
THE RESULTS OF CONSEQUENTIALIST LOGIC
As I have argued, if the only thing that matters is results, then almost any method undertaken to produce those results will be acceptable. We can trace the consequences of this logic in action most clearly if we explore the norms and culture of business school students.
Extensive data demonstrate three facts. First, business school students are the most instrumental in their orientation toward their education, viewing getting a degree in business mostly in terms of what it can do to enhance their salaries and job-finding prospects. So, Rynes, Trank, Lawson, and Ilies (2003: 270) noted that “research has shown that business students are more likely than almost any others…to view education primarily as a stepping stone to lucrative careers.” McCabe and Trevino (1995: 211) reported that business school students placed “the least importance on knowledge and understanding, economic and racial justice, and the significance of developing a meaningful philosophy of life” compared to other students. And, their study found that “students planning to enter business rated being well-off financially as a significantly more important life goal than any other occupational group” (McCabe and Trevino, 1995: 211). Moreover, similar results hold for students outside of the United States as well. A report from the United Kingdom stated that “over 90% of students take MBAs to improve their career opportunities” (Council for Excellence in Management and Leadership, 2002: 18). The idea that business school students are more “in it for the money” than students pursuing other occupations has developed a taken-for-granted aspect: “Any examination…of graduate management education must consider the return on investment for an MBA degree” (Bruce and Edgington, 2003: 12).
One interesting question is how much of these differences are the result of self-selection—students planning to enter business are different from other students even before they start their education—and how much of the difference is a consequence of what the schools teach students once they are enrolled. This question is not likely to be an either-or proposition, as both effects may be important. There is, however, little doubt that what business schools teach their students does have an effect on their values. For instance, the Aspen Institute has conducted a longitudinal study in which business school students were surveyed at various times as they progressed through their (in this case graduate) business education. The results of those surveys indicate that, over their time in the program, students rated shareholder value as a more important criterion for companies and rated criteria such as fulfilling customer needs and product quality less important (Aspen Institute, 2001).
Second, a more instrumental orientation toward education results, not surprisingly, in more cheating in school. McCabe and Trevino (1996) found that students who were attending school primarily in order to obtain a credential to get a better job were more willing to cut corners and cheat than students with a stronger intrinsic interest in the subject. And, McCabe and Trevino (1995) reported that the more importance their survey respondents placed on financial success, the more likely the respondents were to report cheating.
If business school students are more instrumentally oriented toward school, and an instrumental orientation is associated with cutting corners and cheating, then the inference would be that business school students are more likely to cheat and would be less likely to sanction academic dishonesty. And that is precisely what the data show. Research by Don McCabe and his colleagues shows that undergraduate business school students are more likely to self-report cheating in their classes than other students such as those in programs related to law, medicine, or the sciences (McCabe, 2001; McCabe, Dukerich, and Dutton, 1991; 1992). The intention to go into business as a career is also a predictor of cheating (McCabe, 2001). As an example of the data on cheating that have been collected, McCabe and Trevino (1995: 210), in a survey of almost 16,000 undergraduates at 31 colleges and universities, found that “business majors report almost 50% more [cheating] violations than any of their peer groups and almost twice as many violations as the average student in our study.” As another piece of evidence, Hendershott, Drinan, and Cross (2000) reported that 66% of undergraduate business majors at a private, Catholic university had observed cheating on exams, as opposed to only 32.1% in law and 17.6% in nursing (cited in Brown and Choong, 2003: 30).
Students in business, concerned more just with outcomes and less attuned to the processes and values implied by those processes, are also less likely to try and do anything about cheating when they observe it than students in other fields. Hendershot, Drinan, and Cross (2000) reported that 11.3% of the law students, 3.2% of the nursing students, but 0% of the business students would report cheating to authorities if they observed it occurring (cited in Brown and Choong, 2003: 30).
Although there is obviously less opportunity to formally study how an emphasis on economic consequences plays itself out in the world of business and organizations more generally, there is certainly some evidence consistent with the argument that thinking primarily in terms of outcomes, at least to the extent that such thinking is characterized by people with business school backgrounds, can induce less than honest and ethical behavior. One study of organizational citations for violating occupational safety and health regulations found that the relationship between organizational size and number of citations was moderated by the MBA composition of the top management team (Williams, Barret, and Brabston, 2000). Specifically, “the link between firm size and corporate illegal activity becomes stronger as the percentage of TMT [top management team] members possessing an MBA degree…rises” (Williams, et al., 2000: 706).
Another strand of literature relevant to the effects of emphasizing consequences on behavior are studies that explore the effects of incentives on conduct. If we accept the argument that financial incentives given for achieving some result in an organization are likely to cause people to focus more on obtaining that result and less on anything other than this end consequence, then the evidence on incentive effects is relevant for our discussion of how an emphasis on consequences can distort behavior. So, for example, incentive pay for garbage truck drivers in Albuquerque, New Mexico, where the drivers get to go home at full pay as soon as they finish their routes, resulted in more traffic accidents and more drivers going to the dump with their trucks filled to over the legal limit (Associated Press, 2004). The recent scandal of overbooking oil reserves at Shell Oil Company may have its roots in the incentive to maintain the company’s stock price. “In a 2001 report, Houston consultants Rose and Associates noted the pressure on managers at publicly traded energy companies to ‘push the envelope of credibility in effort to buoy investor confidence and thus increase stock value’’’ (Cummins, et al., 2004). And, a study of teacher cheating in the Chicago public schools to artificially inflate students’ scores on standardized tests concluded that the observed frequency of cheating responded strongly to fairly minor changes in incentives (Jacob and Levitt, 2002). This evidence, then, is also consistent with the idea that an emphasis on consequences, created through incentives, provides an impetus to unethical and illegal behavior.
THE ROLE OF ECONOMICS AND ITS LANGUAGE AND ASSUMPTIONS IN THE PRODUCTION OF CONSEQUENTIALIST THINKING
The next part of the argument concerns where this emphasis on consequences above all else comes from. I argue that the emphasis on consequences, and mostly consequences measured in a reasonably circumscribed fashion, is in part the result of the ascendancy of economics and economic language. Economics has become the dominant social science. Fourcade-Gourinchas (2002) noted that nearly every country now offers economics classes in the higher education system. Citation patterns in academia show the growing importance of economics in political science (Green and Shapiro, 1994), law (Posner, 2003), and organization science (Pfeffer, 1997). Economics is cited more by other social sciences even as economics cites those other social sciences much less frequently (Pieters and Baumgartner, 2002: Baron and Hannan, 1994), which provides evidence of the status advantage enjoyed by economics.
Economics influences management practice and social policy through its language and assumptions, which become realized in institutional arrangements, norms of appropriate behavior, and by making some aspects of social life more or less salient through what gets talked about and the vocabulary that is used (Ferraro, Pfeffer, and Sutton, in press). Economics emphasizes consequences—the fundamental axioms begin with the assumption of utility maximization—and concepts such as productivity, efficiency, and, obviously, economic outcomes. Because people are assumed to be pursuing their own, individual utility maximization, the norm of self-interest is presumed to be powerful and both normative (people should behave according to the dictates of self-interest) and descriptive (people do behave following self-interest). Economics as a discipline is virtually value free, apart from the values of individual choice, rationality, and a belief in competitive markets. As Jost, et. al. (2003: 84) noted, “economists are usually careful not to claim that there is anything inherently fair, just, or morally legitimate about market procedures and outcomes,” and Sen (1985) has also commented on the absence of moral considerations in discussing economic allocative systems.
If economics education produces more of a focus on consequences in equilibrium—where the idea of equilibrium end state is another important part of much of economic analysis—and less focus on the processes that produce these equilibria, and if consequentialist thinking does, as we argued above, tend to produce more opportunistic and unethical behavior, then the logical inference is that those with economics training should act differently than those without such training. And a growing body of evidence suggests that this difference in behavior does, in fact, occur.
Marwell and Ames (1981: 306-307), in a series of twelve experiments, found that people voluntarily contributed a substantial proportion of their resources to provision of a public good in contravention of the idea of free-riding, with one exception: economic graduate students were far more likely to free ride than any other group, contributing only about 20 percent of their resources to the group, compared to the 42 percent contributed by non-economists. In an experiment using a threshold game, Cadsby and Maynes (1998) found that economics and business students, compared to nurses, tended to move toward an inefficient free-riding equilibrium more frequently. Using an ultimatum game (e.g., Thaler, 1988), Carter and Irons (1991) observed that student subjects who were majoring in economics tended to keep more resources for themselves than students who had declared a major other than economics and were not enrolled in an economics course. Frank and Schulze (2000) provided evidence that economics students were more corruptible than others. In an experiment, students in a German university were asked to recommend a plumber for a film club from a set of offers that varied both by the price charged and by the amount the recommender would receive if the plumber they recommended were selected. Economics students were more likely than others to recommend a plumber that charged a higher price when they personally received more money for doing so. Frank, Gilovich, and Regan (1993) reported that economists defected more often in a prisoner’s dilemma game and that economics professors were less likely than those from other disciplines to donate to charity.
As in the review of the studies of business school student cheating, the issue arises as to whether these results, and those of other, similar studies, reflect the consequence of self-selection or if it is the actual learning of economics and its principles, assumptions, and language that creates these behaviors. Both processes, of course, may be operating and they are not mutually exclusive. The typical study tries to resolve this issue by comparing populations at an early stage in their education when they have decided on a major but not yet had extensive exposure to coursework with populations, some portion of which have had a number of courses in economics. Carter and Irons (1991) concluded that economists are born, rather than being made through coursework, while Frank, Gilovich, and Regan (1993) provided evidence that more exposure to economics inhibited cooperation on a prisoner’s dilemma task, suggesting that self-interested behavior was learned. Resolving this issue is not straightforward, because of the idea of anticipatory socialization. People may, once choosing to enter an organization, occupation, or profession, come to identify with their chosen career destination even before they enter, and conform to what they believe the norms and values of their target are perceived to be. So, if economics majors believe that economics teaches the norm of self-interest, they may adopt that norm and associated behaviors even before they are exposed to the courses, in anticipation of joining the economics community.
ALTERNATIVE FRAMES FOR UNDERSTANDING BEHAVIOR
We have seen that training in economics seems to be associated with less cooperative (in prisoner’s dilemma situations, for instance), more corrupt behavior characterized by more free riding. It is also the case that economic language and assumptions and the evaluation of decision outcomes solely in economic efficiency or productivity dimensions is consistent with, if not causal of, an emphasis on the logic of consequences, narrowly construed. And this consequentialist logic has its own pernicious effects on behavior. Moreover, it is not the case that economic language, assumptions, and theory dominate because there are not plausible rival alternative perspectives on organizations. In fact, there are several such perspectives that may offer a better lens through which to understand organizations and also to provide a theoretical foundation for understanding and building ethical, cooperative behavior. I briefly outline a few of these alternative perspectives below.
It is important at the outset to recognize that although an economic model of behavior with its associated language and assumptions has come to dominate both policy making and thinking and has assumed an almost taken-for-granted aspect, this dominance is not based on the economic model’s ability to more accurately explain or predict behavior, nor is it premised on the approach’s value as a guide to public or social policy. Kuttner (1996) has presented examples where reliance solely on market mechanisms and price signals leads to policy prescriptions that are logically problematic and empirically false in their implications. Bazerman (in press) has argued that many of the predictions of the economic model have been shown to be false, for instance, by the work in behavioral decision theory that has challenged many of the assumptions of individual rationality.
If economic theory is not so successful in understanding behavior, how does its acceptance and indeed dominance persist? One answer is that theories and their associated language and assumptions matter and are not solely of academic interest because those theories, once widely accepted and believed, come to affect the norms that govern behavior and become true because they are believed, even if they were initially false. As Robert Frank (1988: 237) noted, “Views about human nature have important practical consequences….[O]ur beliefs about human nature help shape human nature itself….Our ideas about the limits of human potential model what we aspire to become.”
Dale Miller’s (1999) analysis of the norm of self-interest shows how this process can work. Ratner and Miller (2001), for instance, found that because people believed in the norm of self-interest, people believed they would be negatively evaluated if they acted on behalf of a cause in which they lacked vested interest or acted again their own apparent interest. Miller (1999: 1053) argued that people acted on the basis of self-interest not because they necessarily were self-interested but because they believed that, both descriptively and normatively, that was what other people did and what they should do, so that people act and speak as if the theory of self-interested behavior were true “because they believe to do otherwise is to violate a powerful descriptive and prescriptive expectation.” By acting as if the theory of self-interest were true, of course, people made the theory true, transforming “image into reality” (Miller, 1999: 1053).
If the image of people propounded by economic models—individualistic, self-interested, free-riders prone to shirking and opportunism—can become self-fulfilling prophecies, so, too, could other conceptions of people. One such alternative perspective is a social model of behavior. As Blau (1977: 1) stated, “The fundamental fact of social life is precisely that it is social—that human beings do not live in isolation but associate with other human beings.” People value these social relationships, in that studies of job satisfaction show that coworker satisfaction is an important component of people’s affective reaction to their work environment. People seek to join and remain in organizations where they can work with others they like and respect. Social relationships help individuals resolve uncertainty (Festinger, 1954). We rely on others to help us make sense of our world, to confirm our attitudes and beliefs, and to help us decide what to do (Salancik and Pfeffer, 1978). Social influence is both pervasive and important.
The importance of social ties and social relationships means that beliefs and practices, not just products or innovations, diffuse through social networks, so that network structure and the content of what is passed through the network are both important. We learn from others—directly and by watching what happens to them, so-called vicarious learning. Unfortunately what we have learned recently is that there is little social opprobrium for violating laws and regulations. Notoriety seems to be more important than what that notoriety is based on—witness the case of Donald Trump, whose businesses are failing but whose appearance on a television program, The Apprentice, has made him someone who is a presumed expert on management and business.
If social relations are important, then several things logically follow. First, it is unproductive to try and understand behavior by looking at social units in isolation, considering only preferences or payoffs from the point of view of the focal individual or organization. Instead, behavior is best understood by considering the social environment in which it occurs, and what that environment makes both salient and attractive. Second, we have an explanation for why people are less prone to free-riding, opportunism, and defecting in mixed-motive situations than some economic models predict: people value social relationships and are willing to forgo immediate self-interest to do things to maintain social ties with important others and to keep their reputations as reliable and trustworthy partners. Absent instruction that tells people that cooperation is counternormative and inappropriate, actions such as collaboration and cooperation that maintain social ties are the most likely behaviors that people will undertake.
Strong culture organizations do things to strengthen the importance and strength of social bonds among people, in the process diminishing individualistic, self-interested behavior and strengthening a sense of collective responsibility and obligation. Southwest Airlines, for instance, the only airline in the U.S. that has been profitable each of the past 30 years, does not prohibit employees who are related or married to each other from working for the company, although they obviously can not supervise each other. The Men’s Wearhouse, a $1.3 billion (sales) retailer of tailored men’s clothing with about a 20% share of the men’s suit market in the U.S., encourages employees to socialize with each other outside of work. It holds elaborate Christmas parties throughout the U.S. and provides a budget to store managers to sponsor social events that involve its people. Southwest Airlines and the Men’s Wearhouse both have values that put employees first, ahead of even customers and well ahead of shareholders. It would be interesting to empirically assess the extent to which strong organizational cultures with values of social obligation and mutual trust and respect score higher on dimensions of ethical behavior. The theoretical expectation is obviously that they would. In contrast, companies such as Enron and Tyco were not just places that defrauded investors, they were also nasty places to work with competitive, cut-throat cultures (see, for instance, McLean and Elkind, 2003: Ch. 5 for a description of the Enron environment). And they were also organizations that did not do well for and by their customers, such as the state of California that was overcharged for electricity.
Yet another model of human behavior has been proposed by Etzioni (1988), who noted that people pursue two goals in their actions: pleasure (or utility) and morality. Means, not just ends, are important to people, and an individual obtains “a sense of affirmation…when a person abides by his or her moral commitments” (Etzioni, 1988: 36). Etzioni reviewed extensive evidence that suggested that people did not act in solely self-interested ways but often exhibited altruistic behavior, even in such individualistic acts as voting. He interpreted these data as showing that people were concerned with what they did, not just the benefits or costs of their actions. Frank (1988; 1990) also argued that individuals forgo self-interest not simply to help their reputation and facilitate subsequent transactions, but because individuals are interested in engaging in commitments that strengthened their likelihood of behaving in ways they felt were right and appropriate. He wrote, “The motive is not to avoid the possibility of being caught, but to maintain and strengthen the predisposition to behave honestly” (Frank, 1988: 95).
At the organizational as contrasted with the individual level of analysis, the institutional theory of organizations also has a strong normative component. As Scott (1995: 37) noted, “emphasis…is placed on normative rules that introduce a prescriptive, evaluative and obligatory dimension to social life. And rules, norms, and duties are argued to be important by March and Olsen (1989) in their analysis of political institutions.
Except from the perspective of neoclassical economics, the idea that organizations and individuals are governed by rules and norms and care about means as well as ends—the path as well as the objective—seems obvious. But the question remains as to where the particular rules and norms that govern behavior originate and how they become institutionalized and how they change over time. It seems clear that norms and rules are problematic, in that their content is contested and their maintenance requires constant vigilance and sanctioning. After all, a norm that is violated and not sanctioned will, over time, no longer be a norm at all. In that sense, the moral dimension of behavior is also self-reinforcing, in that if rules and norms are maintained by the collectivity, people come to see such rules and norms as part of the environment and take them for granted. By the same token, if rules and norms are left unenforced and untransmitted, people will behave accordingly and there will be a breakdown in the moral, rule-based foundation for behavior.
So, the normative or moral model of behavior, much like the social model, directs our attention to the production and reproduction of rules, attitudes, and norms as people interact. Self-interest can be assumed or taken for granted, but the rules that govern individual and organizational behavior must be created and maintained. This is one of the crucial tasks of organizational leadership. This creation and maintenance of the social order can scarcely be left just to markets, which are, by their very definition, arenas in which the self-interested behaviors of numerous autonomous actors get worked out.
SOME IMPLICATIONS
There are several implications that follow from the preceding analysis and data. The first is what should be at least a portion of the content of education in professional schools such as schools of business and engineering. Business schools, facing a crisis of legitimacy in the 1950s, have increasingly become social science departments in an effort to gain respect. As Grey (2001: S27) noted, business schools “fear…the scorn of other, more traditional academic subjects.” To some extent for campus legitimacy and other reasons, engineering schools have also turned increasingly to their scientific roots. Curricula have, as a consequence, become ostensibly value free and places to learn the mastery of subject matter and technique. Although Harvard Business School has recently put material on leadership, ethics, and values into a required core course, this effort is the exception rather than the rule. A more typical scenario is adding elective courses on ethics and values when scandals occur, but enrollments are often limited and such courses fall off the schedule when the public attention to organizational misconduct wanes.
There is, of course, nothing wrong with science and social science, and certainly theory and academic scholarship should and does form a critical foundation for education in management and related disciplines. But if we look at law and medicine, it is clear that understanding techniques, data, and methods is not enough. Phil Larson, formerly head of the anesthesiology department at Stanford and a former student in the Sloan program, once told me that to be a good and successful doctor, individuals not only required a mastery of both the knowledge and techniques and skills of medicine, but they had to be doctors, to identify with the role, to comport themselves in a certain way, to talk a certain way, and, in other words, to be fully identified with the physician role. Doctors take the Hippocratic oath as a way of publicly asserting certain professional obligations. In a similar fashion, lawyers are officers of the court, admission to the bar requires passing an examination on legal ethics, and ethics and values are a more prominent part of the curricula in law school than in the typical business school.
What this implies is that rather than being an optional elective to be added or deleted as corporate scandals wax and wane, considerations of values and ethics must be more centrally integrated into the curricula of business schools and, for that matter, schools of engineering and universities as a whole. As Khurana, et al. (2004) noted, the professionalization of management is very much unfinished business. Professions are characterized by a common body of knowledge, a system for certifying individuals are fit to practice the profession, a commitment to use knowledge for the benefit of clients and the general public and to place the practitioner’s interests first, and a code of ethics with provisions for monitoring and sanctioning violations (Khurana, et al., 2004: 3). The absence of ethical codes of conduct and professional norms of public service—almost impossible following the implications of consequential, economistic logic—stands in the way of management being a profession. Thus, the introduction of values into management education and development would seem to be an essential first step toward increasing the professionalization of management.
Some will complain that values and ethics have only a limited place in academic institutions, which need to emphasize the scientific and objective bases of knowledge and practice. But, contemporary education is not value free now. By emphasizing the consequences of choices rather than the values underlying the choices and decisions themselves, and focusing on those consequences primarily through a relatively narrow, focused lens of efficiency and competitiveness, our curricula and discourse already influences how students come to see the world. Moreover, an effort to imbue ethical behavior and thinking requires exposing students to other, alternative conceptions, language, and frameworks for apprehending behavior besides economics, and possibly even building those frameworks into numerous courses where students can see the implications of following one or another line of analysis.
The implications for organizations are, in many ways, parallel to those for educational organizations. It is nice to have ombudsmen and internal auditors and chief ethics officers, and it is nice to have CEOs attest to the honesty of the financial statements their companies publish, something now required by the Sarbanes-Oxley legislative reforms. But none of this will make much substantial difference, as formal rules and regulations can be avoided or even fought until they disappear, just as many executives are currently fighting the accounting proposal to require that stock options be expensed on corporate income statements. People inside organizations learn what really matters in numerous ways—by what is talked about, by what questions get asked, by who gets rewarded, by who and what gets recognized and applauded. Unless and until companies become more concerned about processes and behaviors in their own right, as well as their consequences, and unless and until some groups other than those who once supplied equity capital—shareholders—receive attention in the focus and substance of organizational decisions, not much will change.
Here there is, possibly, some hope for there is evidence that organizations can do well by doing good. O’Reilly and Pfeffer (2000) reviewed both case examples and statistical studies that showed that the implementation of high commitment work practices, founded on a set of assumptions about people, organizations, and management, could produce sustained success over a long period of time. They posed the question as to what the barriers to imitation were, why companies did not easily or quickly imitate Southwest Airlines or Toyota, for example. Their answer was the primary role and importance of values:"…money by itself isn’t sufficient for motivating really long-term high performance. As David Russo has noted, a raise is only a raise for thirty days; after that, it’s just your salary….values...act as a gyroscope for the organization, keeping it focused on its core capabilities….values provide a cornerstone for the design of a selection process that helps attract the right types of people….The result is that these organizations are able to capture more of the skills and talents of their employees than their competitors." (p. 235-236).
But perhaps the most fundamental implication of the foregoing analysis is simply this: what is required for different conduct—and different outcomes—is a different way of thinking. As Kathryn Clubb, former partner in charge of partner development for Accenture, so nicely put it, in order to have different results, you have to do different things. But in order to do different things, at least on a consistent and long-lasting basis, you must actually think differently. Economics is not just a theory but a language and set of assumptions that can, over time, become normative guidelines to behavior. Challenging the rise of consequentialist logic and its potentially pernicious effects requires confronting assumptions, language, and implicit norms and values in a substantive debate that then becomes implemented in what is taught in universities, in corporate executive programs, and in other domains where information and values are transmitted. Building social values into the fabric of organizations requires not just posting values on wall plaques or cards carried in wallets or purses, but in infusing these values—values of social connection and moral behavior—into the very fabric of organizational practices and decisions. It is only by debating and discussing the deep consequences of the values implicit and embedded in our models of human behavior, and making conscious choices about what values we will choose to live by and inculcate in our schools and work organizations, that institutional reform can possibly be achieved and the future be both different from and possibly even better than the past.
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