Opinion

A company in good standing?

James N. Baron — April 2007

Could the market do more to improve ethical performance than professionalization? Professor Jim Baron proposes that voluntary certification of various facets of corporate responsibility could create a market for good behavior.

Corporate scandals and ethical upheavals have prompted some to question the quality of "managerial inputs" business schools are producing and to advocate stronger professionalization of management. Critics worry that MBAs don't learn ethical precepts akin to those taught in schools of medicine or law or, even worse, that business education may actually cultivate managerial approaches that give ethical considerations short shrift. Business schools by all means should constantly re-examine their managerial and societal relevance, as well as their academic rigor, particularly in times of such torrid change. But I suspect that neither changes in management education nor efforts to professionalize management will ultimately be the most effective tools for reducing ethical transgressions.

Management and entrepreneurship lack several key characteristics of professions which have effective ethical codes of conduct. Professions restrict access—through professional associations and processes of credentialing, licensure, and continuing education—to individuals who have suitably demonstrated mastery. In contrast, the prospect of sanctioning someone for "practicing management without a license" seems to contradict some of our most cherished values and principles.

Professionals are also principally loyal to their clients, rather than the enterprises that employ them. Curmudgeonly physicians, insufferable attorneys, eccentric scientists, and incendiary journalists generally can get away with such conduct so long as they are excellent at what they do, as judged by standards of competence and ethical conduct that govern their profession. In contrast, dutifully saluting the organizational flag is not simply a politic thing for managers to do: it is often a key part of the job description. My dictionary defines "manage" as "to have under effective control." Doctors, lawyers, scientists, and journalists can be highly effective in their work while displaying profound disdain toward those who lead the firms where they are employed; it is hard to imagine a manager being effective in that same circumstance.

All of this makes me doubt that management can be professionalized in a manner similar to medicine, law, and other occupations. If we seek greater accountability and higher standards of ethical management, I suspect we'll have to look elsewhere. Ironically, perhaps one answer lies in the very construct that gives management its reason for being: the market—specifically, markets for reputation. Amazon, eBay, and Epinions are only a few examples of how markets for reputation can be created to help consumers gauge the reliability and trustworthiness of exchange partners and to sanction misconduct, even within global, anonymous communities. If we want managers to ethically discharge their responsibilities to stakeholders, why not devise reputational mechanisms to promote that behavior and sanction its absence? This could be done on the managerial inputs side and/or the outputs side.

With respect to managerial inputs, recall that a few decades ago, "quality" was as amorphous and ephemeral a term as "management ethics" is today. The emergence of ISO 9000 certification in 1987 created a means by which companies could achieve and sustain a credible reputation for quality management. That same approach has been extended in the last decade to environmental management through ISO 14000. The International Standards Organization that oversees these certification processes states: "Both ISO 9000 and ISO 14000 concern the way an organization goes about its work, and not directly the result of this work. In other words, they both concern processes, and not products—at least, not directly."

It hardly seems fanciful to imagine comparable standards being developed for a host of other dimensions of management, including those associated with the ethical treatment of stakeholders. Today, manufacturers can readily evaluate potential suppliers based on their certifications for quality management. Suppose prospective employees could easily do the same thing with regard to diversity management or work-life balance. Suppose customers, investors, and other stakeholders could gauge what certifications, if any, an organization has attained regarding how it relates and contributes to its surrounding communities. Suppose government agencies, socially responsible businesses, and other pioneers began weighing such certifications in selecting suppliers or project partners. Formulating standards in these various domains will no doubt be demanding, but certainly not insuperable. Specific screens already exist for institutional investors seeking to promote corporate social responsibility through their equity holdings. If credible standards for environmental management can be promulgated, I see no reason why equally credible standards cannot be articulated for the state of the art in various facets of ethical management.

Another approach would be to create markets for ethical reputations based on measures of managerial outputs, as assessed by relevant stakeholders. Traveling with Dean Joel M. Podolny and 40 SOM students to Africa this January, I was fascinated at how leading firms within numerous South African industries have joined forces to formulate "black economic empowerment" charters, which specify precisely how targets and achievements relating to reducing racial inequalities will be calculated and communicated. To be sure, this collaboration in addressing the legacy of apartheid is motivated largely by the looming threat of social unrest or political intervention as less welcome alternatives. But that's part of the point: conversations in the United States have focused almost entirely on whether to strengthen or relax the force of Sarbanes-Oxley, a legislative approach to corporate social responsibility that almost nobody regards as first-best (and that merely proscribes unethical acts, rather than motivating prosocial conduct). The corporate social responsibility movement stands to learn an enormous amount from South Africa's experiments with driving profound organizational and societal changes through public measurement and reporting systems that emphasize reputational incentives, not just penalties for corporate malfeasance.

Some U.S. firms have already experimented with similar approaches. When Deloitte & Touche USA launched its Women's Initiative in the early 1990s, for instance, the firm's leadership committed to publish detailed annual reports showing how the firm was doing in hiring, promoting, and retaining female professionals. Ben and Jerry's 2005 Social and Environmental Assessment Report candidly discusses results from the ice cream maker's routine employee surveys showing that "a significantly increased number of employees expressed concern about the Company's leadership, its customer focus, and its commitment to values than in [the prior survey]."

Proliferation of easily accessed input and output "social responsibility" metrics would have several powerful effects. First, what is measured is what gets attended to. The behavior of airlines is certainly affected by monthly publication of government data on delays, baggage, and customer complaints. Second, in a world of voluntary reporting, failure to disclose would be a powerful negative signal to stakeholders about a firm's ethical character, whereas firms embracing social responsibility would be eager to disclose in order to signal their superior trustworthiness and dependability. Consulting firms or survey research houses might even find it profitable to collect and tabulate such data at little or no charge, merely to induce loyalty among corporate clients by providing valuable benchmarking reports. (In South Africa, black economic empowerment initiatives and charters have fostered enormous business opportunities for local accounting and consulting firms.)

Creating more efficient markets for ethical reputations is surely not a panacea. It will not guarantee that managers become all-ethical, all-the-time. It won't escape the distortions that so often arise with measurement systems. And it doesn't diminish the need for business schools (and other institutions) to scrutinize carefully the explicit and implicit ethical messages they convey. But in a world that increasingly surveys and measures everything, failing to develop standards and metrics for socially responsible management virtually guarantees that ethics get short shrift. The fact that ethical considerations are sometimes tougher to operationalize than financial outcomes is no justification for failing to measure the former. As the eminent statistician John Tukey once observed: "Far better an approximate answer to the right question, which is often vague, than an exact answer to the wrong question, which can always be made precise."