A Simple Yet Specific Five-Step Method for Making Ethical, Profitable Business Decisions

The study of business ethics is the study of right and wrong in the conduct of business. But right and wrong according to whom? A business transaction that seems right to a stockholder or CEO might seem wrong to an employee or customer. Even the most ethical businessperson often doesn’t know what the right thing to do is. He or she could ask 10 very ethical people what the right thing to do is and receive 10 different answers.

To complicate matters more, a businessperson has three – sometimes conflicting – responsibilities:

  • an economic responsibility (to make a profit for the company and an adequate living for himself or herself);
  • a legal responsibility (to comply with the law); and
  • a social responsibility (to do as much good for, and as little harm to, people, other living things, and the planet as possible).

These three responsibilities are often collectively referred to as corporate social responsibility (CSR). They can also be referred to as the 3P’s—people, planet and profits—or the triple bottom line (3BL). How does a manager make decisions that are all three: ethical, profitable, and socially responsible?

I have devised a little framework I hand out to students in the business ethics course (Economics 629; the course is called Business and Society) I teach at the University of New Haven. It attempts to streamline or simplify the ethical decision-making process in business. It is a simple yet specific five-step method to help managers solve ethical problems in business. It helps you make decisions when reasonable minds can differ over what is the right thing to do. It consists of five questions that you – a business manager, employee, or student – should ask yourself and answer about any action you are contemplating in business (selling a product, firing an employee, negotiating a deal, lobbying the government, or anything else you do in business).

Question 1. Is it illegal? If it is illegal, don’t do it. If it is illegal, it is unethical. If it is illegal, it means society has reached a consensus, evidenced by a majority vote of our elected representatives, that it (the action you are contemplating) is wrong and will not be allowed. But some business conduct is difficult to classify as “legal” or “illegal.” An example is unpaid internships. A company “hires” or “has” college students serving as unpaid interns. They do some work for the company, gain some experience, make some contacts, and boost their resume—but don’t get paid for it. Is the company doing something illegal? Is the company violating the minimum wage laws by not paying the interns for their work? The answer is, it depends. Another example is negative job references. Is it illegal for an employer who terminated an employee to tell a prospective employer of that employee (if the prospective employer calls the former employer and asks how the employee’s job performance was) that the employee’s job performance was very poor? The answer is, it depends. Rather than my taking time and space in this blog to fully explain the answers to those questions, I will simply point out that these are examples of questions that arise in business that do not have a clear “yes” or “no” answer to the question, “Is it illegal?” And what, exactly, does the word “illegal” mean? For the purpose of this five-step ethical analysis, I define “illegal” to mean something quite specific: a violation of a statute or regulation of a city, state or the federal government. If something or some course of action is illegal (it violates a statute or regulation), don’t do it. If something or some course of action is legal, or difficult to classify as legal or illegal, go to question 2.

Question 2. Is it a tort, breach of contract, or other activity that might cause someone to sue you in court and win? If your answer is yes, you probably shouldn’t do it, though it might depend on circumstances. If your answer is yes, you are exposing your company to civil liability. If someone sues your company and wins in court, your company is held civilly liable, and the court can force your company to pay money to the plaintiff (the person or entity that sued you). A tort is a wrongful or negligent act for which the law can force the wrongdoer or negligent party to pay money (usually called “damages”) to the victim. If your answer to Question 2 is yes, then you probably shouldn’t do it, but it might, depending on circumstances, be ethical to do if the risk of harm, or if the amount of money your company could lose in the lawsuit, is very slight. If your answer is no, go to question 3.

Question 3. Will it offend people, and if so, will it offend enough people so that the amount of money you lose by doing it is greater than the amount of money you gain by doing it? If your answer is yes, you probably shouldn’t do it, though it might depend on circumstances. Keep in mind that many goods and services that offend some people are enjoyed by and demanded by other people. Consider, for example, the company known as the Philadelphia Eagles—a professional football team. One could argue that the Eagles have low ethical standards: They hired ex-convict Michael Vick to be their quarterback after he was released from jail. In 2007, Vick pleaded guilty to running an illegal gambling and dog-fighting operation in which many dogs were killed, was sentenced to two years in prison, and served almost two years in prison. After he was released in 2009, the Eagles hired him to be their quarterback. Does this mean the Eagles have low ethical standards? Vick broke the law, but the question for our purpose is not whether Vick broke the law but rather whether the Eagles broke the law or otherwise exposed their company to civil liability by hiring Vick. The answer is no. Did the Eagles offend people by hiring Vick? Yes. Some people – many people – were offended by it. But many other people felt that Vick, having served his prison sentence, had paid his debt to society and should be given a second chance. Did the Eagles gain more financially by hiring Vick than they lost? I don’t know, but if the answer is yes (if they gained more than they lost), it is difficult to criticize them for hiring him. Remember, you can’t please everybody. This is a tough world, and to make a living you sometimes have to do things that some people will not like.

Questions 1 through 3 pertain to activities that are or might be profitable, but that also have a negative side – they are illegal, they expose your company to civil liability, and/or they offend people (they offend some people, anyway). What about doing good deeds, such as philanthropy or going “green,” that are not as likely to be profitable? Your company might even lose money on them, at least in the short run. Should you do them? Go to question 4.

Question 4. Is there a substantial likelihood that it (the good deed) will eventually increase your profit? This question pertains to any business decision, but it particularly pertains to decisions about philanthropy and other good deeds that you might want to do but that may or may not return a profit. They may even decrease your profit, at least in the short run. In the long run, hopefully the good deed will eventually pay for itself and return a profit, as a result of the good publicity and other goodwill that flows from doing good deeds. So, if your answer to questions one, two, and three is no, and your answer to question four is yes (that is, you want to do a good deed and you think the good deed will eventually pay for itself and increase your profit), then do it. If your answer is no, go to question 5.

Question 5. Is the good deed so good that it will make you and others at your company feel good, and is this good feeling sufficient compensation so that your company doesn’t care if your company lost some money on it? If your answer to questions one through four is no, and your answer to question five is yes, then you can probably go ahead and do it, but first ask yourself, or ask your bosses and/or your stockholders, if they approve of it. If they don’t approve of it or if you think they would not approve of it, then either don’t do it or, if you do it, be prepared to answer to them. Hopefully, if you do a good deed that causes your company to lose a little money you will not be fired for it. But be prepared, as always to answer to your bosses and stockholders, as well as to your conscience.

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