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Business Profs: VW Emissions Scandal Highlights Trade-Off Between Profit And Ethics

Do business schools produce graduates who have little conception of ethics?

Tue Nov 24 2015

By Sumesh Nair and Greg Lopez

Are widespread business malfeasances a reflection that the business case always trumps ethics? 

The Volkswagen emissions scandal, price gauging by the pharmaceutical industry, the LIBOR scandal: all add to an endless litany of unethical business practises.

These unethical behaviours appear to be widespread and traverse many industries and economies, across small and large firms, and involve individuals at all levels of authority.   

What is driving this malfeasance?

One way to analyze this complex issue is by framing it as the choice firms make between maximizing profit and the consideration they have for societal welfare.

There has been an increased focus on business ethics. A contentious subject, it is broadly explained as the philosophy that scrutinizes the “rights” and “wrongs” of business behaviour.

Many theories and ideas contribute to modern business ethics, but the utilitarian theory appears to dominate. In the utilitarian conception, business ethics is one that optimizes pleasure and minimizes pain, while considering the preferences of those affected by the decisions businesses make.

But in reality, whose “pleasure”, whose “pain”, and whose “preference” is considered?      

Revisiting the Volkswagen (VW) case, the complexity becomes apparent. There is no doubt that VW was involved in unethical behaviour and was practising bad business ethics. It has admitted to manipulating emissions test data, and it used an illegal defeat device in some vehicles.

But why would a world leading company, from a country known for its precision engineering and industrial prowess, in an economic union known for high regulatory standards, selling a sophisticated product and service, in the world's most sophisticated market, would resort to such behaviour? It remains puzzling.

Several hypotheses have emerged to solve the puzzle. They range from firm-specific factors such as the governance and corporate culture and style of its CEO to external factors, such as low consumer buy-in for green technology; business schools that produce graduates who have little conception of ethics; and the failure of regulatory systems.

The inability to come to a consensus on the primary factor demonstrates the complexity of the issue, but also why business ethics remains a contentious subject.

Returning to the trade-off between the business case and ethics may provide a parsimonious explanation.

Corporate profits and shareholder value are tangible, while ethics may not be. Certainly the hit that VW has taken makes ethics tangible now to the firm. But if those hits (the pain) do not outweigh the gains (pleasure) that VW and its key stakeholders derived from 2009-2015, then it may be that the preference for the business case over ethics was the rational choice.

What do you think? 

Sumesh Nair is a senior lecturer in marketing at Murdoch University and Greg Lopez is research fellow at Murdoch University Executive Education Centre