Profit and Ethics

Koch Industries CFO Steve Feilmeier was the guest speaker in our MBM class at Wichita State University yesterday, and he had some interesting things to say about ethics in business. While widely-publicized recent corporate scandals have fostered in many people's minds the notion that the pursuit of profit by its very nature leads to poor behavior, Feilmeier has a very different perspective. Profit, in a system of free exchange, is an indication that someone has created value for others. When companies fall into ethical lapses, more often than not it is because they have failed to discover how to create real value. As Feilmeier noted, "At the root of many of these  scandals is a business model that isn't working."

When companies have discovered how to deliver sustainably superior value to customers, in other words, they don't need to engage in creative accounting, or political efforts to restrict competition. Their successful pursuit of profit is one of the key things that distinguishes them from unethical companies. It's an inability to legitimately turn a profit that leads some corporate actors to behave poorly.

With this in mind we can begin to see one of the ways that the concepts embodied in the term "Principled Entrepreneurship" fit together. Effective entrepreneurial action produces profit, making unethical behavior a waste of time. A culture infused with strong principles, meanwhile, makes unethical behavior a non-starter. One of the advantages of building a company based on principled entrepreneurship, then, is that it will be filled with people who, most importantly, will not tolerate any violation of law or integrity, but also who would never need to do such a thing, because they are focused on creating genuine value for customers.

Comments

[Jennifer]

Maybe I'm missing something, but don't you think inflated CEO salaries or corruption are more a question of incentives? Even if you're focused on creating genuine value for customers, you still have a little thing called "self-interest." I would imagine that companies whose employees personally benefit from making the company profitable would be less likely to violate the law.

[Tony]

Jennifer,
I'd separate the notion of inflated CEO salaries from corruption, because while the former is a subjective evaluation, usually based on unsystematic, anecdotal evidence, the latter clearly, objectively connotes wrongdoing.

So, isolating our conversation to corruption, certainly self-interest drives bad behavior, but it also drives good behavior, in the right system and culture. My point was that when most people are making money the proper way, they have neither time for, nor interest in, making it the improper way. Profit, in other words, is not inherently linked to bad behavior; quite the contrary.

Your basic point, however, I agree with, which is that a system in which people can benefit from the value they create is the best alignment of incentives.

[RamonGustav]

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[new balance]

Power invariably means both responsibility and danger.