A social media company switches from an algorithm that makes its content harmfully addictive. A banking firm dumps a client that is strong-arming state legislators and subverting democracy. A tech firm begs off on a merger that would give it monopoly power and squelch competition.
In each case, companies are foregoing profits to do the right thing—a dicey decision that could bring lawsuits from shareholders, depending on how it’s presented, says Santiago Mejia, PhD, a professor of law and ethics in the Gabelli School of Business. He offers these hypothetical examples in a recent paper in the Business Ethics Quarterly, in which he advocates for a legal rule protecting executives who cite ethics when doing things that could hurt profits.
Mejia spoke to Fordham Now about the need for an ethics judgment rule. Focusing on Delaware, since that’s where most public companies in the U.S. have incorporated, he said the rule could be enacted by the state’s legislature or through a judge’s ruling that sets a legal precedent. Companies incorporate in Delaware in part because its specialized business court has deep expertise and a long history of rulings, which reduces legal uncertainties for companies based there, he said. Delaware is “the most important state for corporate governance issues,” Mejia said, noting that other jurisdictions tend to follow its rulings.
Why would we need an explicit rule allowing companies to put ethics first?
While managers at public companies have discretion to pursue ethical initiatives, what I found in my research is that these decisions have to be justified under the guise of profit. Executives are allowed to pursue ethical action if it’s framed as doing well by doing good. I don’t want to deny that there are many instances where doing good is profitable, but there are also many cases where it’s not.
Are there recent examples that illustrate the primacy of profits?
There was the ruling in Delaware in the case of eBay v. Newmark, in 2010, where eBay had a stake in Craigslist and sued because they wanted the company to pursue various profitable opportunities. The Craigslist board members basically said they were focused not on maximizing profits but on providing a useful public service. The judge ruled that they were supposed to pursue profits and were failing to fulfill their fiduciary duties to shareholders if they were not doing so.
What would be the impact if an ethics judgment rule was adopted in Delaware and elsewhere?
I think this would improve our public discourse about ethics. It would empower executives to say, “We’re not doing this because it’s wrong,” and insofar as executives say that, there’s more public awareness among shareholders, among executives, among boards, that profit maximization has ethical limits.
Whenever people in companies are trying to justify ethical behavior by the bottom line, I think that makes ethics instrumental, simply a means to an end. This diminishes ethics. It doesn’t recognize its mandatory, binding nature. Sometimes what ethics requires is not doing well but doing right.
Who decides what’s ethical? And which harms are acceptable or not?
I think executives should decide that case by case, given the kind of company they’re heading, the history of the company, the company’s culture, and its ethical norms. I think some leeway is actually not only acceptable, but positive, since we live in a society that respects people’s right to live according to their individual perspectives.
How do these ideas show up in your classes?
In class I try to highlight that I don’t take an issue with making money, but with making money any kind of way. There’s tons of things that are legal and that are unethical, and you should recognize that. And that does come up in the class frequently.
