Virtual Learning Resource Centre

Moral capitalism: Reconciling private interest with the public good

by Stephen Young, Berrett-Koehler, 2003.

Abstract

The Caux Round Table “Principles for Business” are a guide for developing a new “moral capitalism”. They represent a comprehensive set of ethical norms for businesses operating internationally across multiple cultures and include both general principles for business and a set of stakeholder principles covering customers, employees, owners/investors, suppliers, competitors and communities. They are the most comprehensive statement of responsible business practice ever formulated by business leaders for business leaders. The development of moral capitalism will ultimately depend on developing “principled leadership”.

(Reviewed by Kevin Barham in April 2007)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

The Caux round table

Corporate accountability and responsibility are major themes in the work of Ashridge Business School. In selecting books to review for the Ashridge Virtual Learning Resource Centre, we therefore try to include significant books which reflect that concern. Moral Capitalism is certainly one of the most important.

It recalls that brief moment nearly 20 years ago when communism (in Europe) and the inefficiencies of centralised state planning had disappeared and the capitalist ethos looked set to rule supreme. Instead, since then, there has been a backlash against the excesses of capitalism – corporate scandals, unfair global trade arrangements, and environmental damage. Some people now question whether capitalism has a future. Stephen Young, the author of Moral Capitalism, responds that capitalism does indeed have a future – but only if it can reclaim its original moral grounding.

Young is Global Executive Director of the Caux Round Table (CRT), an international network of business leaders who are working to promote a “moral capitalism”. The concern of the original members, led by the chairmen of Philips and Canon, was to focus attention on the importance of global corporate responsibility in reducing social and economic threats to world peace and stability. (Caux is a small village in the Swiss mountains overlooking Lake Geneva where the group first met in 1986.)

The dialogues between European, US and Japanese business leaders inspired by the Round Table led to the formulation of the CRT’s “Principles for Business”. These were formally launched in 1994 and first presented at the United Nations World Summit on Social Development in 1995. They represent a comprehensive set of ethical norms for businesses operating internationally across multiple cultures. They are seen by many as the most comprehensive statement of responsible business practice ever formulated by business leaders for business leaders.

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Moral capitalism is possible

Before looking at the principles themselves, we need to understand some of the thinking behind them. The author argues that the ethical standards inherent in capitalism have been steadily compromised by the “short-sighted dog-eat-dog” doctrines of Social Darwinism (“survival of the fittest”) and by cultural values inimical to what he sees as capitalism’s egalitarian, rational spirit. He describes capitalism as having degenerated into “brute capitalism” – arrogant, amoral, interested only in the narrow definition of the bottom line. It is this brute capitalist ideology, he believes, that has led to the scandals and social problems of capitalism today.

According to the author and the members of the Caux Round Table, however, a moral form of capitalism is possible. Seeking market profit through business and the professions is “honourable and worthy”. Based on the CRT principles, the author says that “each of us can go to work every day for any business, great or small, feeling genuinely happy and proud of our career commitment.” Moral capitalism is the best means by which our modern, global civilisation can empower people and enrich their lives materially and spiritually.

The CRT’s membership spans the globe and the principles reflect this. The principles are a concentrate of moral, ethical, philosophical and jurisprudential wisdom from many traditions including Chinese moral philosophy, Islam, Hinduism, African spirituality, Judaism, Japanese Shinto, Buddhism and Christian, both Roman Catholic and Protestant. They also draw wisdom from successful business leaders.

The author suggests that most profitable business combines virtue and interest. A successful business maximises the present value of future earnings, so the first requirement of business success is sustainable profits. To achieve them, we need to replenish the five forms of capital we invest in the business and which must be paid for out of the earnings of the business:

Social capital – this is provided by society and consists of the quality of laws, the cultural and social institutions, infrastructure such as roads and telecommunications, education and health and value environments that encourage or discourage enterprise.
Reputational capital – this adds value to a business by attracting and keeping customers, employees, investors and suppliers.
Financial capital – access to money.
Physical capital – land, plant and equipment.
Human capital – the quality, creativity, loyalty and productivity of employees.

In preserving its access to these forms of capital by paying a return on capital from earnings, a business acts from self-interest but promotes social well-being at the same time. The selfish pursuit of the “bottom line” leads a responsible business to satisfy the needs of others.

The wise steward of enterprise makes a profit in ways that preserves access to all forms of capital. An enterprise must please others in order to prosper. And that service is a moral activity, “subordinating self to what is beyond the self”. It is “enlightened self-interest” or, as the author prefers to call it, “self-interest considered upon the whole”. (He takes the latter expression from the 18th century Scots philosopher Thomas Reid.)

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The value pyramid

People cannot live without the moral dimension. We are not emotionally self-sufficient but are both born into society and for it; morality reflects the regard for others that arises in a social setting. Ethics is the course of conduct that makes room for others in our decision making. The author suggests that we need to understand how ethics work in individuals’ lives if we are to invoke moral power to drive capitalism.

To do this, he uses the concept of the “value pyramid”. At the top of the pyramid is a realm of abstract thought where awareness exists. At the bottom of the pyramid is the realm of action. The objective of morality is to impose on the level of action goals and ideals drawn from the abstract realm. The force that draws goals and ideals out of inner awareness and imposes them on life is human willpower and decision making.

Moral capitalism needs people willing and able to seek out moral considerations and apply them in their lives. We therefore have to train and develop people with the capacity for moral decision-making – people who leave room in their calculations for long-term consequences, for win-win relationships, and for acting with honour and integrity. The more such people set the rules for capitalism, the more capitalism will become moral.

The challenge of moral capitalism is to tip the balance of wealth creation toward humanity’s more “noble” purposes and away from brutish behaviour. It relies on a decision-making culture created and sustained by individuals acting from principle, regardless of their formal position in the hierarchy. This does not require people to “live a life of saintly virtue”. We need only ask for a “presence of mind” that manages the tension implicit in the overlap of virtue and self-interest. It was the lack of such a presence of mind, says the author that led to Enron.

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Using private interest for the public good

Moral capitalism means using private interest for the public good. The author makes two arguments about moral capitalism.

Argument 1: Free markets.

First, free markets have an inherent tendency to bring about a convergence of virtue and interest. The logic of self-interest considered “upon the whole” when applied to business over time leads to betterment for the individual as well as for society. That happens because:

Free markets promote virtuous conduct. Ownership of private property (as argued by the German philosopher Hegel) is necessary for morals. People have a need to leave their mark on the world; that only happens when some part of the world is appropriated to being especially ours, to the exclusion of control by others. Moral choice presumes that people are in a position to choose, that they are in command of some force or power that can make a difference. The rich have many options, the poor have very few. One can choose an ascetic life – like Buddha or Christ (although the author notes that the ability of a Mother Theresa to serve the poor in Calcutta depended on her ability to attract donations from the wealthy). By making it more and more possible for ordinary people to gain the means of expressing their values and moral inclinations, capitalism serves a moral end.

Free markets promote moral behaviour among buyers and sellers. Markets will not survive without trust. Where cheating and mistrust and broken promises prevail, markets shrink and are reduced to barter. Only sellers who establish a reputation for fair dealing can grow their customer base, borrow money or trade goods on reasonable terms. Over time, immoral people are driven out of markets because fewer and fewer people will risk the consequences of buying their goods or accepting their deals.

Free market capitalism promotes individualism. It rewards innovation and “state-of-the-art” skill and sensitivity in meeting the needs and demands of others. It makes room for new values, products and services and responds to change. By offering new possibilities for work, ownership and self-expression, capitalism can provide a framework for “existential” human freedom and, in so doing, serves a moral end.

Capitalism promotes mutuality. As game theory shows, calculated pursuit of self-interest brings individuals into arrangements that have benefits for others as well as themselves. Confronted with other self-calculating, self-interested people in bargaining situations, people do, over time, work out the best for themselves by providing others with something of advantage to them. Through interaction, pursuit of self-interest arrives at a stable equilibrium of mutual benefit. Acting out of interest stabilises the expectations others have of our future behaviour more forcefully than if we act only from charitable impulses. Others look to our interests, not our will, to calculate how true our conduct will be to our word. So, at times, self-interest promotes higher levels of trust. Our interests are more permanent than our fleeting impulses to do good for another. It may also be easier to compromise on interests than positions on which we have staked our pride or self-esteem.

Argument 2: Sense of service.

The second argument for moral capitalism is that it is promoted by a sense of service to others. Free markets can accomplish laudable ends, but may not always be able to offset the countervailing impulses set loose by advocates of brute capitalism. A “proper” state of mind among those in business is necessary for moral capitalism to flourish fully. We need to think of ourselves as holding an “office”, as one who is an “officer”, who has duties and is expected to be responsible. Officers are entrusted with the powers of a position and are expected to be “dutiful” in the exercise of those powers and to act responsibly with a view to the advantage of others.

The idea of office is derived from the Roman philosopher and politician Cicero’s notion of officis which the author believes is the best template for conduct conducive to moral capitalism. Merely by being ourselves we always have an office to perform in the markets of capitalism. In that office – whether as buyer or seller, worker or investor – we need to be honest and reliable and assert our self-interest with a view toward the whole.

The author argues quite reasonably that humanity is generally better off with markets and capitalism than it is with poverty and feudalism. But he has to admit that markets and capitalism can facilitate abuse of the power they create and cannot cure the “hardness hiding in many human hearts”. Governments can use laws and regulation to align incentives so that self-interest considered upon the whole leads market players towards socially beneficial outcomes. But this will not overcome all the shortcomings of capitalism: for example, capital still does not flow to poor countries, creative accounting still manipulates investors, and so on.

We therefore need to move beyond the law to voluntary calculation of how best to achieve good. Acting upon principle happens most naturally when it arises out of habit and mental discipline. The author contends that the foundation of good judgement lies in what he calls “good character”, in the choices we make about the values that command our value pyramids.

The author sees moral responsibility as a form of stewardship – of “fiduciary undertaking”. It asks how my decisions affect others, especially those who have the power neither to reward nor punish me for my decisions. [The word “fiduciary” derives from the Latin fiducia for “trust” and is related to faith and fidelity.] In a legal context, a fiduciary responsibility is the highest duty of care under the law.

The author suggests, in fact, that the common law of Britain and America provides a basis for moral capitalism in the fiduciary responsibilities imposed on agents, partners, trustees, and corporate directors and managers. The fiduciary must take into account – as if the other were an extension of the self – the interests of those who stand to benefit from the proposed action. As the author describes it, the fiduciary must “inwardly fuse consciousness of the other into consciousness of the self to then act from awareness of a wider set of needs, interests and values”. In this way, fiduciary thinking gives us a morality for decision making and an ethics of character.

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Moral capitalism and poverty

The author sees global poverty as the greatest challenge for moral capitalism. Market capitalism and the private property it uses to create an endless flow of wealth bring great benefits. But those benefits are not shared equally. One billion people in the world, mostly living in the rich countries, are doing well, while 3 billion people – half of humanity – live on less than $3 a day. Another 2 billion people are poor but live in countries that are making some economic progress. The continuing existence of the poor refutes for some people the possibility of ever having a moral capitalism.

But capitalism does offer a way out from the poverty trap. The author’s argument here centres on the way that capitalism uses time. Unlike bureaucratic and traditional peasant and feudal economic systems, capitalism brings time future into time present. The investment of capital creates a future sequence of “market contingencies”, one event following upon another, into present economic advantage. By using time in a capitalist fashion, the poor can gradually, step by step, improve their condition. The author describes how capitalism converts time into present value in four ways:

Savings – money saved at compound rates of interest over time accumulates into capital, allowing even ordinary workers to become capitalists. However, high inflation can nullify savings and is the enemy of moral capitalism. More sophisticated financial institutions and lowering interest rates are vital to overcoming poverty.
Productivity enhancement – the learning of skills or gaining access to new technology improves one’s productivity so one person can do the work of several. The time formerly asked of many is compressed into the time spent by one who as a result earns more than he or she did before.
Financial mechanisms – by having others entrust their capital to you, or by borrowing their funds, the time spent by them in accumulating wealth can be converted to one’s advantage and one can use their financial strength to have a bigger impact in the markets.
Education – this sacrifices current time in exchange for enhanced market value in the future.

The policy conclusions for moral capitalism drawn from this analysis are that societies should:

Provide individuals, especially the poor, with institutions through which they can save at compound rates of interest.
Introduce mechanisms of micro-credit and productivity enhancement for those who have few material advantages.
Place the social capital of education within reach of the poor.

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A joint venture between government and business

But governments alone cannot put an end to global poverty. Moral capitalism asserts that ending poverty is a joint venture between responsible governments and ethical businesses. Obtaining new wealth requires investment of capital in order to expand market opportunities.

Genuine wealth, the kind that funds sustained economic growth, has its roots in private property. Government wealth is “parasitic” and takes from private wealth through taxation. Private investment makes economic growth happen and when a country’s growth rate improves, the standard of living for its people rises as well. Government redistribution of wealth from rich to poor would subsidise the poor but would not create the motors for self-perpetuating economic growth.

The money to fund the necessary private sector investment in poor and developing countries exists in private hands. The challenge is to move those funds into productive investment in those countries. Only the global private investment community controlling most of the world’s liquid wealth – $79 trillion at one estimate – has the means to significantly correct the inequity of global poverty. But do these investors have the will to act? Will they build moral capitalism on a global scale?

The author believes that private investors should care strongly about all this. The self-interest of wealthy nations, corporations and individual investors, considered upon the whole, requires an effort to promote private sector economic growth in poor countries because:

The world is interdependent as never before. Diseases like AIDS can spring from any country where public health is ignored and easily spread elsewhere.
Poor economies will not develop strong middle classes, will find it hard to sustain democracy, and will succumb to anarchy or terrorism which will endanger other countries near and far.
Rising living standards will make it easier to restrain population growth.
Wealthy, advanced countries, with their aging populations, need new opportunities for wealth creation. Investment in the growth of the poor but populous countries, as long as it is non-exploitative, could earn returns for wealthy countries sufficient to pay for the costs due to aging and declining populations.

So what is government’s role in the joint venture with business? The author argues that overcoming poverty through private investment must begin with responsible government and its role in producing and protecting the social capital needed for economic growth – in creating and safeguarding the property rights that are the basis of capital, for example. Some of the important conditions of social capital necessary for successful development include political stability, government officials not tainted by corruption, a basic infrastructure that will satisfy the needs of business, a well-functioning civil society based on the rule of law and enforceable contracts, and a certain level of education.

Although private business can improve standards of living through the creation of wealth, business only responds to opportunities for profitable exchange. Government must provide for sustained wealth creation through laws, enhancing social capital, and improving the physical infrastructure. (With these observations about the role of government in mind, the CRT sets out some general principles for governments to live by, backed up by a set of “core best-practice standards”, based on the fundamental principle that public power is held in trust for the community.)

Globalisation has not helped the reputation of business in the developing world. Poor countries doubt the sincerity of the wealthy countries when they profess to help their needy counterparts but at the same time deny them access to wealthy markets for agricultural and textile products. They fear that globalisation will undermine their traditions and cultural values. Despite these concerns, investment from the private sector is the only way that poor nations will improve their living standards.

The CRT believes its Principles for Business will help to reassure developing countries. The aim of the principles is to give business leaders around the world sensible rules for ethical and good corporate citizenship. Global use of the principles will promote trust among businesses in different countries, encouraging the flow of capital and the exchange of technology round the world. If followed, says the author, they will prevent many of the negative outcomes of globalisation and so will lead to more equitable development among the world’s people.

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The CRT principles for business

Having considered the background arguments about the need for moral capitalism, let’s now look at how this translates into the CRT Principles themselves. These are based on the notion that, without moral values in business decision making, stable business relationships and a sustainable world community are impossible. Law and market forces are necessary but are insufficient guides for conduct.

CRT presents the principles as a “world standard” against which human behaviour can be measured and as a basis for dialogue and action by business leaders seeking business responsibility. The principles themselves are a blend of three basic ethical principles which inspired the CRT participants’ early discussions, and each of which is derived from a different part of the world:

The notion of stewardship with regard to stakeholder interests as proposed by some of the CRT’s American participants.
The Japanese concept of kyosei – this means living and working together for the common good, enabling cooperation and mutual prosperity to coexist with healthy and fair competition.
Human dignity, as espoused by Pope John Paul II, refers to the sacredness or value of each person as an end, not simply as a means to the fulfilment of others’ purposes.

In this way, says the author, America, Japan and Europe each contributed a moral vision to the final statement of global business principles. The result, he says, was “historic” – the first global code of conduct for capitalists written by senior capitalists from different moral traditions. The principles consist of seven general principles and a set of specific stakeholder principles covering customers, employees, owners/investors, suppliers, competitors, and communities.

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The CRT general principles

The seven Caux Round Table General Principles for Business are as follows (the principles themselves are in italics and are followed by a word of explanation):

1. The Responsibilities of Businesses: Beyond Shareholders Toward Stakeholders

The value of a business to society is the wealth and employment it creates and the marketable products and services it provides to consumers at a reasonable price commensurate with quality. To create such value, a business must maintain its own economic health and viability, but survival is not a sufficient goal.

Businesses have a role to play in improving the lives of all their customers, employees and shareholders by sharing with them the wealth they have created. Suppliers and competitors should expect businesses to honour their obligations. Businesses must act as responsible citizens of the local, national, regional and global communities in which they operate and share a part in shaping the future of those communities.

This general principle defines the social office of private enterprise and all business activities and decisions must keep this role in mind. A business is a “social status” with duties and responsibilities to the common good; it does more than make money for its owners and investors. It also creates a duty to reduce poverty by increasing wealth and employment where conditions permit. The business approach to poverty reduction is doing more business – subsidy of the poor and social capital expenditures are the responsibility of government and charities to which businesses contribute through taxation and charitable contributions.

2. The Economic and Social Impact of Business: Toward Innovation, Justice and World Community

Businesses operating in foreign countries should contribute to the social advancement of those countries by creating productive employment and helping to raise the purchasing power of their citizens. They should contribute to human rights, education, and welfare of those countries.

Businesses should also contribute to economic and social development in the world community at large through effective and prudent use of resources, free and fair competition, and innovation in technology, production methods, marketing and communications.

In other words, it is the responsibility of business to build better lives for people throughout the global community and to improve conditions in countries where they do business.

3. Business Behaviour: Beyond the Letter of Law Toward a Spirit of Trust

Businesses should recognise that sincerity, truthfulness, the keeping of promises and transparency contribute to the smoothness of business transactions, especially internationally.

This principle calls for businesses and managers to act according to the standards of trust that moral capitalism requires and rewards. It calls for “character” in decision making, not just “grudging compliance” with the minimum conditions set by local laws and regulations.

4. Respect for Rules

To avoid trade friction and to promote free trade, equality in competition, and fair treatment for all participants, businesses should respect international and domestic rules.

Those who fear genuine free markets and the possibility of failure sometimes go beyond the bounds of legitimate market competition to use some external force or power with which to get their way with customers, employees, investors, etc. Legal privileges, such as monopolies, and corruption and insider relationships can also interfere with normal market forces. This principle therefore seeks to keep market activity within the bounds of legitimate competition.

5. Support for Multilateral Trade

Businesses should support the multilateral trade systems of the World Trade Organisation and similar international agreements. They should cooperate in efforts to promote the liberalisation of trade and to relax domestic measures that unreasonably hinder global commerce.

This principle calls on businesses to broaden the scope of their purchases and sales to embrace a global business community. Free access to business opportunity provides an economy with the freedom of action that allows people to enhance the value of their property. It enables people to express their “personhood” through exercising dominion over property – this goes beyond simple ownership and includes active use of property to realise its potential. Unless people can do this, incentives will disappear, economies will stagnate and full human dignity will never be achieved.

To avoid this “immobility of personal destiny”, owners need to compete in the marketplace. Restraints on trade, legal or otherwise, truncate our freely chosen moral possibilities. Principle No. 5 affirms this right of competition at the level of the global economy, especially with regard to the moral claims of poor and developing countries to gain wealth by which to enhance the dignity and moral choices of their people. They should be able to sell and trade what they own with all the countries in the world.

6. Respect for the Environment

Businesses should protect and, where possible, improve the environment, promote sustainable development, and prevent the wasteful use of natural resources.

This principle comprehensively states the obligation of a business to be “mindful” of the needs of our global environment.

7. Avoidance of Illicit Operations

Businesses should not participate in or condone bribery, money laundering or other corrupt practices and should seek cooperation to eliminate such practices. They should not trade in arms, drugs or engage in other organised crime.

Rejection of illicit and corrupt transactions is one way in which companies and individuals can contribute to the formation and growth of constructive social capital.

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Turning principles into action

How do the aspirations set out in the principles turn into action? Just publishing the principles is not enough to get them implemented. To assist companies in putting the general principles into operation, CRT has, as noted, also developed a set of stakeholder principles which address a company’s responsibilities towards specific stakeholder groups.

In addition, CRT has developed a corporate responsibility self-assessment and management process. The assessment framework takes the form of a “Criteria Matrix” which measures the company’s performance on each of the seven General Principles against each of the stakeholder areas. For example, performance concerning trust and transparency (General Principle 3) is judged in terms of its relationships with customers, employees, owners/investors, suppliers, competitors and communities. Similarly, for all the other general principles

The process enables a company to assess whether it has a policy for success in that particular area, how each policy has been translated into goals, and what results have been achieved in reaching those goals. This provides a 360-degree survey of the enterprise and its approach to responsibility. It addresses the concerns of every stakeholder and shows how far the firm adheres to the seven General Principles. The process identifies shortfalls that need management attention and risks that management needs to take action to reduce. Acting on its self-assessment, says the author, should make the company more profitable and more socially responsible.

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The CRT stakeholder principles

That the CRT Principles for Business are the most comprehensive responsibility principles available for business decision making is due to the thoroughness with which they consider stakeholder concerns. The book devotes six substantial chapters to how firms should address the interests of each of the stakeholder groups. Each chapter sets out the principles for dealing with a particular stakeholder group and describes the reasoning behind them. A questionnaire at the end of each chapter enables the reader to rate their own company’s performance with regard to that stakeholder group. The principles (in italics) are as follows:

Customers

Businesses should treat all customers with dignity, irrespective of whether they purchase their products and services directly from the business or acquire them in the market. Businesses have a responsibility to:

Provide their customers with the highest quality products and services consistent with their requirements.
Treat their customers fairly in all aspects of their business transactions, including a high level of service and remedies for customer dissatisfaction.
Make every effort to ensure that the health and safety of their customers, as well as the quality of their customers’ environment, will be sustained or enhanced by their products and services.
Assure respect for human dignity in products offered, marketing, and advertising, and respect the integrity of the culture of their customers.

Customers are the heart of market capitalism. Only they provide the money out of which both wages and profits come. Brute capitalism looks at customers as prey, but abuse of market power and exploitation will ultimately drive customers away. To keep their customers coming, businesses need goodwill. “Only a fool would intentionally sabotage his company’s goodwill,” says the author.

Employees

Businesses must believe in the dignity of every employee and take employee interests seriously. They therefore have a responsibility to:

Provide jobs and compensation that improve workers’ living conditions.

Provide working conditions that respect each employee’s health and dignity.
Be honest in communications with employees and open in sharing information, limited only by legal and competitive constraints.
Listen to and, where possible, act on employee suggestions, ideas, requests and complaints.
Engage in good faith negotiations when conflict arises.
Avoid discriminatory practices and guarantee equal treatment and opportunity in areas such as gender, age, race and religion.
Promote in the business itself the employment of differently abled people in places of work where they can be genuinely useful
Protect employees from avoidable injury and illness in the workplace.
Encourage and assist employees in developing relevant and transferable skills and knowledge.
Be sensitive to the serious unemployment problems frequently associated with business decisions, and work with governments, employee groups, other agencies, and each other in addressing these dislocations.

These recommendations are based on the concept of “agency”, whereby the principal has duties towards his agent, and the agent also has fiduciary duties towards the principal. An agency relationship between a firm (the principal) and the employee (the agent), involves notions of loyalty and mutual assistance that go beyond the “cash nexus” hire and sale of simple labour.

An agency relationship also implies that the firm depends on its employees for their professional skills and judgement. On account of this dependency, employees must receive due regard from employees for showing loyalty and good judgement in serving the ends of the enterprise. The ties that bind an employee to the success of his or her company are (says the author) more moral than they are economic. Moral capitalism means that businesses should look at employees as agents who are specially qualified for work rather than simply as units of labour power.

Promote competitive behaviour that is socially and environmentally beneficial and demonstrates mutual respect among competitors.
Refrain from either seeking or participating in questionable payments or favours to secure competitive advantages.
Respect both tangible and intellectual property rights.
Refuse to acquire commercial information by dishonest or unethical means, such as industrial espionage.

The “right” kind of competition furthers the social goal of wealth creation. It seeks mutual satisfaction between buyer and seller, not power or the “thrill of winning”. It is “other regarding”, keeping in mind how we can better meet people’s needs in the marketplace. Market competition, therefore, has social advantages. It provides moral capitalism with discipline and rigour, forcing hard decisions on owners, investors, employees, customers and communities alike without destroying wealth and investment prospects.

Communities

As global corporate citizens, businesses can contribute to reform and human rights in the communities in which they operate. They therefore have a responsibility in those communities to:

Respect human right and democratic institutions, and promote them wherever practicable.
Recognise government’s legitimate obligation to the society at large and support public policies and practices that promote human development through harmonious relations between business and other segments of society.
Collaborate with those forces in the community dedicated to raising standards of health, education, workplace safety, and economic well-being.
Promote and stimulate sustainable development and play a leading role in preserving and enhancing the physical environment and conserving the earth’s resources.
Support peace, security, diversity, and social integration.
Respect the integrity of local cultures.
Be a good corporate citizen through charitable donations, educational and cultural contributions, and employee participation in community and civic affairs.

Business lives within a civic order, not a jungle. Immutable relationships of mutual dependency and advantage bind business and society together. Businesses, both large and small, must accept the office of “citizen”. In creating wealth, business uses power and creates power; its decisions affect the lives of many. Power necessitates accountability because, without concern for consequences, power can easily be put to bad uses that will inspire mistrust and fear and undermine civil order. As long as it is powerful, the moral sense of humanity requires that business be accountable for the ways in which it creates wealth.

Owners/Investors

Businesses should honour the trust their investors place in them. They therefore have a responsibility to:

Apply honest and diligent management in order to secure a fair and competitive return on their owners’ investment.
Disclose relevant information to owners/investors subject to legal requirements and competitive constraints.
Conserve, protect and increase the owners/investors’ assets.
Respect owners/investors’ requests, suggestions, complaints and formal resolutions.

“Fiduciary” thinking informs these principles and is at the core of moral sense, as it attaches responsibility for others to the use of power. The requirement is not to serve the profit motive of owners at any cost; return on equity need only be within reasonable limits. The principles do insist, however, that management should not waste the owner’s money with earning only low returns or with losses. Returns on investment need to be “competitive”. If the business is not creating wealth for society, it should go out of business, with its remaining investor equity redeployed to other, more profitable market opportunities.

Suppliers

Businesses’ relationships with suppliers and subcontractors must be based on mutual respect. They therefore have a responsibility to:

Seekfairness and truthfulness in all their activities, including pricing, licensing and rights to sell.
Ensure that their business activities are free from coercion and unnecessary litigation.
Foster long-term stability in the supplier relationship in return for value, quality, competitiveness, and reliability.
Share information with suppliers and integrate them into their planning processes.
Pay suppliers on time and in accordance with agreed terms of trade.
Seek, encourage and prefer suppliers and subcontractors whose employment practices respect human dignity.

Suppliers and subcontractors should not be seen as “strangers to the business”. Some balance of interest must be negotiated with them to maximise the company’s ability to provide its customers with quality goods and services at an appropriate cost.

Competitors

Fair economic competition is one of the basic requirements for increasing the wealth of nations and ultimately for making possible the just distribution of goods and services. Businesses therefore have a responsibility to:

Foster open markets for trade and investment.
Recognise government’s legitimate obligation to the society at large and support public policies and practices that promote human development through harmonious relations between business and other segments of society.
Collaborate with those forces in the community dedicated to raising standards of health, education, workplace safety, and economic well-being.
Promote and stimulate sustainable development and play a leading role in preserving and enhancing the physical environment and conserving the earth’s resources.
Support peace, security, diversity, and social integration.
Respect the integrity of local cultures.
Be a good corporate citizen through charitable donations, educational and cultural contributions, and employee participation in community and civic affairs.

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Principled business leadership

As the author says, principles are not able on their own to alter reality. It takes people to put principles to work. Putting ideals and values into action is the task of leadership, regardless of the position one holds in a business hierarchy. Leadership brings quality to organisational life, for good or bad depending on the personality of the person asserting power. Values, ideals and vision create the leader’s “charisma” which attracts others into cooperation with them. In this way, leadership acts as a field of energy aligning individuals with a purpose by providing them with clarity through messages both explicit and implicit.

Capitalism by itself cannot eliminate abuse of power. And laws and regulations and design of market incentives to maximise socially responsible wealth creation can only go so far in doing so. Part of the solution, according to the author, must be the development of people of “character”. It is character that triggers awareness of “self-interest upon the whole” and which extends our time horizon out from the present far into the future to contemplate consequences. Character extends our self of sense out to include the perceptions and feelings of others.

Principled business leaders must respond to three challenges:

They must have “moral sensitivity”. This means they must be alert to ethical norms and principles. They must have an “affinity for virtue” and a sense of calling. They need to understand that work is not just instrumental; it brings meaning to a group or community.
They must be able to apply principles to specific situations. This requires creativity and reflection; there are no templates or “how-to” manuals.
They must know the business from both a practical and a theoretical perspective. The author suggests that a “sound programme of business education” will supply much of the necessary understanding here.

Success in these three areas is achieved by developing deeply held and clearly perceived values and beliefs. Leaders must know where they want to lead others and why. The principled business leader is an “inner-directed” person, guided by his or her moral sense and having confidence in its power of truth (though not blind confidence, we hope).

To make good judgements, leaders begin with first principles, as discovered by their moral sense, and then impose them on reality – “a leader starts with principles and ends with results”. The author suggests that because judicial decision making begins with the application of a principle, leaders can learn from judges about decision making.

The leader needs to “find virtue” by listening to something deep within him or herself which gradually reveals itself to break through his or her superficial prejudices. Listening for this profoundness within ourselves, says the author, is an underused action-oriented discipline, a “hidden treasure” in finding life’s meaning for oneself and making a unique contribution to building a better world. The purpose of invoking one’s moral sense in this way is not to find satisfaction but to be able to venture beyond one’s “little precinct” into the world at large.

Finding virtue is one thing; keeping it is another. Moral capitalism cannot take it for granted that principled business leadership will prevail. Environments that encourage principled leadership need to be cultivated; character needs daily sustenance and reassurance. The challenge is to produce principled business leaders by nurturing the development of mature, inner-directed, courageous, and selfless people who will bring moral responsibility into the world. We might feel this is quite a challenge. The author suggests the following approaches:

Workshops and sessions for reflection and deepening of purpose and awareness.
Mentors to take younger executives under their wings.
Publication and dissemination of relevant writings concerning corporate responsibility and moral leadership to provoke reflection and inspiration.
Efforts by business schools to open their students – aspiring executives – to leadership insights.
For people in business, a regimen of personal practice to enhance their capacity for ethical decision making. This requires integrating one’s faith, core values and spiritual life into one’s work.

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Moral capitalism and the “Bottom of the Pyramid”

We would like to encourage as many managers as possible to read this book. It does, though, require careful reading. Perhaps surprisingly for a work that is based on the deliberations of top businessmen, some parts are highly philosophical, even spiritual.

How CRT’s prescriptions will work out in the real world remains to be seen. It is encouraging that the ideas are already being taken up by some leading firms. An example of how one major company – Nissan – has applied the CRT’s corporate responsibility self-assessment process can be found at http://www.cauxroundtable.org/Nissan.pdf. Nissan says that its aim is, not only to create value by providing products and services, but also to contribute to the development of society through its business activities. It has used the CRT self-assessment process as the basis for implementing its new global policy on corporate social responsibility.

One of the particularly interesting aspects of the book is the way in which it views eradicating poverty as the greatest challenge for moral capitalism. Its basic assumption is that directing private investment to the poorer countries and encouraging economic growth will in themselves alleviate poverty. The question is how far the benefits of investment and growth actually trickle down to the very poor majority of the population at the “bottom of the pyramid” in developing countries. (Not to mention the concerns of economists like Herman Daly who believe that unlimited growth is destructive of the environmental resource on which the economy depends and is morally indifferent to unwanted side effects like unequal distribution of wealth. Daly’s book Beyond Growth is to be reviewed on the VLRC.)

A view is emerging among some business academics that companies need to engage more directly with the world’s very poor, selling products and services designed for their needs and helping the poor to become entrepreneurs. It is suggested that by doing so, companies can not only make a major contribution to alleviating the plight of the poor across the world, but can also find significant new markets and make a profit at the same time. This is the argument of such books as The fortune at the bottom of the pyramid by CK Prahalad, Capitalism at the crossroads by Stuart Hart, and Make poverty business by Craig Wilson and Peter Wilson. If this vision were realised, it would be a spectacular example of “self-interest considered upon the whole”.

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