When the word “ethics” is mentioned to people of business, the immediate reaction is to talk about how to prevent bribery, extortion, untruthful advertising, tax evasion, cooking the books and other forms of corrupt practices in business.  Thanks to a best seller written by Professor Domenec Mele of the IESE Business School, one of the best in the world in executive education, business ethics is placed at the very core of good management.  It is presented as a means of seeking human excellence in organizations.  In the book “Management Ethics,” (Palgrave Macmillan, 2012), Professor Mele successfully develops the thesis that ethics is embedded in the manager’s moral character which is reflected in his actions that show honesty, diligence, concern for people, a great sense of service, or the very opposite.  He then enumerates the consequences of lack of moral character:  “Greed could be the great motivator of giant corporate frauds such as those performed by the former executives of Enron, WordCom, Parmalat and Adelphia Communications among many others; not to mention those who abetted the subprime crisis in 2008.”  But to be fair, there are also many examples of how good moral character in managers resulted in outstanding business successes:  “In striking contrast we see a fair number of executives with behavior characterized by professional will and humility who were part of those companies studied by Jim Collins which went from good to great.  Professional will and humility are personal moral qualities embedded in the manager’s character.”

          Professor Mele summarizes the seven positive consequences of ethics in management:

          1.  Humanizing business:   Management focuses on doing things effectively and efficiently, but through people.  Management would not be good on the whole if efficiency was achieved at the cost of inhuman working conditions or if people acted at the marketplace like animals in the jungle.  Managers should promote efficiency, but not at any cost.  Ethics reminds us that people in an organization are rational and free beings, and not cogs in a machine, and they require respect and treatment in accordance with the human condition.  In the Philippines today, there are top executives of the booming IT-BPO sector that are seeking ways and means to humanize the working environment of call center agents and others in the BPO industry.  As is well known, many workers in this sector face adverse working conditions not only because their work can be repetitive and monotonous but is carried out during unholy hours late at night and early morning.  Thinking about the welfare of these workers goes beyond concern for efficiency and profit but requires the virtue of generosity or real concern for people on the part of the managers who try to provide for the “integral human development” of their workers.

          2.  Generating trust.       Trust is in the very essence of doing business.  Professor Mele cites one study in which it is argued that the formation of trust is strongly influenced by three principal factors of perceived trustworthiness—ability, benevolence and integrity, all inhering in the moral character of the manager.  Ability has to do with technical competence.  The other two dimensions are related to ethical behavior learned in previous interactions or in the perception of moral qualities of an individual, group or institution.  Benevolence is the extent to which a trustee is believed to want to do good to the trustor aside from the egocentric profit motive.  Integrity refers to the trustor’s perception that the trustee adheres to a set of principles that the trustor finds acceptable; for instance, keeping one’s word, honoring contracts and not telling lies.  There are outstanding examples of trustworthiness in banks and insurance companies in the Philippines that have been around for a half century or more, such as Bank of the Philippine Islands and Insular Life.

          3.  Promoting loyalty.  Loyalty is especially important as regards customers and employees.  Professor Mele points out that empirical research shows that when customers believe that the firm is ethical, the inducement and special treatment received are seen in a positive light and can help develop loyalty.  Findings revealed that salesperson’s ethical behavior leads to higher customer satisfaction trust and loyalty to the company that the salesperson represents.  Customer loyalty is especially pronounced in the Philippines as regards responsible pharmaceutical, food and beverage companies, such as United Laboratories and Alaska Milk Corporation.    In the case of employees, when the managers are perceived as sincerely concerned with the total welfare of each and everyone in the workforce, loyalty induces the employees to remain with the organization, make sacrifices for the good of the company and go the extra mile whenever necessary.  As a negative example, down-sizing, rightsizing and re-engineering with massive lay-offs might not be perceived as ethically correct if there are reasonable alternatives.  For example, in the 1990s when San Miguel Packaging adopted more modern technology that necessitated right sizing, the late Raul Hernandez, who was the CEO then, went to great extent to invest in the retraining of those to be separated, not only in new skills but in entrepreneurship so that some of them could start their own businesses.  This generated a great deal of loyalty among the remaining workers.

          4.  Favoring social acceptance and reducing transaction costs.  Managers with good moral character respect people and the environment.  The absence of this respect can elicit hostile reactions against the guilty company while most demonstrations of social responsibility to planet and people are welcomed and contribute to a company’s reputation.  Habitual ethical behavior on the part of the managers can also reduce transaction costs.  Transactions do not take place in a vacuum.  Contracts reinforced by laws, social regulations and customs, shared norms within a community, control and trust in the counterpart contribute to a sense of security in the fulfilment of contracts and in the enforcement of behaviors.  The lower the trust, the greater the transaction costs in terms of expensive contracts and measures of control.  These transaction costs can be especially pronounced in the litigious environment that prevails in the Philippines, where a multitude of lawyers are always looking for opportunities to earn money by suing for breach of contracts.  (To be continued)