Cultivating an ethical business practice and attitude is crucial to the central philosophy of management and vital to sustain the long-term health of a business. But the many insurmountable catastrophes that have resulted over the past twenty years would suggest there is a clear disconnect between ethics and business. Earlier this year Goldman Sachs paid $5 billion to settle claims of fraudulent mortgages dating

Unethical business practices erode the fundamental pillars of our economy: trust and stability

back to the 2008 crisis. Many of the lawsuits alleged that Goldman deceived their clients into believing mortgage bonds were of AAA quality, when in fact they were lower quality and more risky. Many victims were ordinary investors and even innocent pension funds. As a result, the U.S. housing market collapsed prompting a worldwide recession leaving none other than taxpayers on the hook for some managers reckless negligence.

So why do managers sometimes make unscrupulous decisions? For one, they are only obliged to their shareholders where the sole objective is to maximize profit whatever the cost may be; there are no incentives to be responsible. As large companies (like Goldman) are often public, thus lacking proprietorship, responsibility is not clearly defined. Within public companies, unscrupulous practices are analogous to the economic concept of the ‘tragedy of the commons‘; something that is not explicitly owned by anyone (public), and is thus overexploited for lack of care. Moreover, incentives in risk-taking are primarily short-term; as management is constantly concerned about next quarters earnings, managers often disregard whether a decision is in the best long-term interest of the firm and society.

So what exactly does fostering an ethical business environment and attitude look like? It starts at the top; leadership of an organization must set a good example for their employees to follow. Decision making must not only encompass self-interest of the firm, but its impact on society. Leaders within an organization must guide others in making ethical decisions. Also, the notion of value based management must be fully embraced; managers must align the operations of the business with universally shared values amongst the firm. Managers must not only focus on creating value for shareholders, but also creating value for all integral functions (customers, manufacturers, suppliers etc.). Collaboration is imperative to fostering an inclusive environment. Ethics in business have many positive effects: a more amicable environment, long-term sustainability and a positive public image. A positive public image builds a trustful bond between a business and its consumers and investors. In turn, the long-term benefits of ethical practice clearly outweigh any short-term incentive.

Sources

http://www.nytimes.com/2016/01/15/business/dealbook/goldman-to-pay-5-billion-to-settle-claims-of-faulty-mortgages.html?_r=1

http://www.investopedia.com/terms/t/tragedy-of-the-commons.asp

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