Moral hazard: The actual issue about business ethics

Ethics and Morals: Timeless and Universal?

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A question came to me: “Honestly, who cares about business ethics today?”

I don’t know who does and who doesn’t. But I think I can see why some do cares, and why some others don’t.

In the very first issue of Forbes magazine in 1917, B.C. Forbes, the founder of the magazine, said this: “The purpose of business is to create happiness, not to pile up millions”. This great concept of business, as much as inspiring and morally upright it sounds, is quite difficult when it comes to implementation.

Some do think that ethics in business are necessary, since business is meant to do good things. Being ethical is in congruence and inseparable with doing good things. Some see this as a sort of old-school view, as we all must admit that most businesses see themselves as profit generators instead of do-good-ers. They argue that the purpose of business is to produce money, which then lead to good things. Good is about the quality of the impact yielded from business process, not the business process itself.

In spite of all the debates, I see that ethics is real and tangible issue when we put it into the perspective of moral hazard.

What I refer to moral hazard here is about basic accountability, credibility and responsibility in business. Moral hazard is about how we can consistently response to risk in effective way, whether we are the one who is directly exposed to the risk or not.

Accountability is about making things clearer in the midst of business uncertainty. To be uncertain is just natural in any business, and therefore, any possible clarity will make things better. Credibility is about promise keeping and trustworthiness, whether it’s a direct and verbal promise or the indirect and implicit ones. Not just promises we had given to consumers or users, but to all stakeholders. Responsibility is about how we take care of things and how we get things done. It is about being part of the solution instead of the problem, and how to make things move forward instead of making it stuck.

It is very easy to demand for accountability to other people whose acts impact our life significantly, while forgetting that we also have similar impact to others. It’s easy to question for credibility of others, and just blindly assuming that our credibility is beyond question. Pointing others for responsibility is far comfortable than continuously checking into ourselves and finding how we took part in the problem.

I said, if we fail to commit on these three, we are committing moral hazard. That is a fundamental problem of business ethics.

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8 responses to “Moral hazard: The actual issue about business ethics

  1. I like the three values; credibility, accountability, and responsibility. However, I think the question is stand still, how can we maintain these values in the midst of crisis?

    Or, should we change our way of seeing things; that we will not be in crisis, if we apply these values consistently?

    Therefore, this article is about anticipation, and not about “cure”, when business in turbulence. What do you think?

    • Well, first of all, I think we can never cure what already happened in the past, right?
      The future is the only thing we have.

      However, to resolve a crisis by reframe it into a constructive change, we need to initiate these three ethical values through action. They will not take effect immediately, but they will bring results. Therefore, it’s fair enough if some consider this as a “cure”.

      What do you think?

  2. Thank your for the explanation James. I think we have to create at least two solution for business in crisis. The first one is the short term one. And of course, the second will be the long term one to create sustainability.

    In the short term, the owner of the business can maximize the effort to gain income in the area that is giving a real and measurable in financial terms profit for the business. It can also cut the salary and benefit of top management to support the lower level worker, so the company do not have to release any employee. I saw the Kompas Gramedia did this in the monetary crisis (1997).

    Meanwhile, the value of credibility, accountability, and responsibility implemented toward whole branches of the company. This is a very important aspect that will guarantee the future of the business.

    I think this two points can give a temporal “cure” for business in crisis. What do you think?

    • Yes, Reza. One of the most common response to crisis is protecting the core business, which means that measures are taken to secure the main business process in order to gain the most effective result possible for the organization. I believe that is your first suggestion.

      I also agree that in crisis, bonuses and other luxurious benefits and privileges are irrelevant. This, however, can still be the case when accountability and responsibility are not enforced. But, if business ethics are in effect, this should be one immediate containment for problems.

      There is only a precautionary note on the expectancy of not releasing people: Not all businesses are like KKG. The nature of media businesses are a bit different to other types of businesses. Avoiding employee release is not something every company in crisis can do. In the case of Indonesia, the cost of people in many types of manufacturing are complex. In crisis, headcounts are not just about the total employee expenditures, but also about the related hidden costs (such as taxes, insurances, production gaps, waste, leadtime, morale, and many others). All of these can actually become ‘inside killers’ in the business process.

      For this issue, business process should be specifically designed in a way that include the possibility of crisis. Therefore, it will have risk management and exit strategies to help itself anticipate crisis with the least cost possible (including downsizing and other type of massive firing).

      In a sense, I think the national policies on human capital, workforce and employement in this country will put everyone at disadvantage. That will be the systemic root of cause.

  3. I agree with you James. From the beginning, business have to include the possibility of big crisis in its grand plan. About the government policy concerning enterprises in Indonesia, it is still in the matter of continuing debate. The basis issue is, what is the main paradigm of our economic policies? And if we already agree about the certain paradigm, how can we put is into practices? Because as old saying says, the devils is in the details…

    Do you have opinion about this?

    • Yes, I agree that we have to have an agreement on which paradigm we will use. I would rather use the term direction, rather than paradigm, because direction implies the practical aspect of the paradigm. However, it’s necessary that paradigm and direction are tools or instruments to achieve our vision. Therefore, it’s possible that we use different paradigm when we are facing different time. Such process should be carefully designed.

  4. Yes. I agree with you James. This morning while driving my bike, I am thinking the same thing. We should learn about all the theories and experiences from the past.

    However, when facing a real problem, we should not focus on the theories and experiences of others in the past. We must try to use our analytical skill with the ability to improvise, adapt, and creating synthesis to the specific context.

    That’s why business is an art..

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