What Moral Courage Looks Like In Business Today

By William Longbrake

Kenneth Frazier, CEO of Merck pharmaceuticals, responding to the tragic confrontation between white nationalists and counter-protesters in Charlottesville, Virginia on August 12th, resigned from President Trump’s American Manufacturing Council on August 14th. He didn’t mince words: “Our country’s strength stems from its diversity and the contributions made by men and women of different faiths, races, sexual orientations and political beliefs. America’s leaders must honor our fundamental values by clearly rejecting expressions of hatred, bigotry, and group supremacy … As CEO of Merck and as a matter of personal conscience, I feel a responsibility to take a stand against intolerance and extremism.”

Frazier’s action demonstrated moral courage in exercising leadership. Perhaps if President Trump had condemned white nationalists’ racism specifically rather than blaming “hatred, bigotry and violence on many sides,” Frazier might have issued his statement but not taken the confrontational step of publicly resigning from the president’s manufacturing council. Although Frazier did not mention President Trump in his statement, the president immediately attacked him by tweeting “Now that Ken Frazier of Merck Pharma has resigned from President’s Manufacturing Council, he will have more time to LOWER RIPOFF DRUG PRICES!”

Initially, even though many other business leaders share Frazier’s values, they were mute. Serving on presidential councils is prestigious. As Trump’s attack on Frazier demonstrated, crossing the president can bring personal excoriation and troublesome negative publicity to the companies they run. As David Gelles and Katie Thomas of The New York Times observed, “… although big companies are increasingly willing to take public stands on many contentious social issues, they also covet their access to a business-friendly White House and are being careful not to jeopardize their relationship with the president.”

Later that day Brian Krzanich, CEO of Intel, and Kevin Plank, CEO of Under Armour, joined Frazier. By August 15th a groundswell began to build, and at a conference call of business leaders the following day they agreed to disband both the Manufacturing Jobs Initiative and the Strategic and Policy Forum. To save face, President Trump tweeted that he was terminating both advisory councils.

In the weeks that have followed, events and controversies involving President Trump have moved on to other matters. During the height of the reaction to Charlottesville, Andrew Ross Sorkin of DEALBOOK wondered, “Where is the moral courage to stand up?” Then business people took a stand. But was that stand simply a response to intense public pressure, or was it a genuine affirmation of the fundamental human value articulated by Nelson Mandela in his autobiography and tweeted by former President Obama: “No one is born hating another person because of the color of his skin or his background or his religion. People must learn to hate, and if they can learn to hate, they can be taught to love, for love comes more naturally to the human heart than its opposite.”

Was Charlottesville a pivot point for American business people to lead with moral courage and to demonstrate not just through words but through deeds that the wellbeing of all Americans is served by more than unbridled pursuit of profits and maximization of shareholder wealth?

In recent decades the conduct of capitalism, as practiced by American businesses, has wandered away from its moral responsibility for serving all its stakeholders. Stakeholder capitalism encompasses businesses acting in ways that benefit all stakeholders rather than exclusively focusing on shareholders. Lou Pepper, CEO of Washington Mutual Savings Bank from 1981 to 1990, embraced the efficacy of stakeholder capitalism and referred to stakeholders as the four C’s – capital markets (shareholders-investors), crew (employees), community and customers. According to Pepper, all four constituencies were of equal importance. The interests of one constituency couldn’t be fully satisfied without harming another constituency. This required balancing. Pepper’s insight was that by focusing in a balanced fashion collectively on all constituencies, shareholders would be well rewarded in the long run.

Over the past five decades, market capitalism, which emphasizes the theoretical soundness of maximizing shareholder wealth, has elevated shareholders to supreme status among stakeholders. Market and stakeholder capitalism do not have to lead to different outcomes. It was Pepper’s belief that shareholder wealth could be maximized over the long run by practicing stakeholder capitalism, while other stakeholders would benefit simultaneously.

In practice, however, market capitalism has devolved into a narrow focus on maximizing earnings, often with a short-run orientation, without giving the welfare of other stakeholders equal consideration. Indeed, the modern theory of the value of the firm presumes that market participants are rational, possess complete information, and use the same decision-making framework, which is accurate and complete. Theory posits that if these assumptions hold (which is hardly the case in the real world), the collection of all individual decisions which is “The Market,” will assure optimal outcomes both for individuals and the community as a whole. Thus, any form of intervention will lead to a suboptimal outcome.

Elmer Johnson, who was general counsel for General Motors in the 1980s, in “(Im)moral Corporation: A Conversation with Elmer Johnson,” succinctly critiqued the flaws inherent in the theory of efficient self-regulated markets by citing the work of Barry Schwartz, who was a psychology professor at Swarthmore College: “… the disciplines of economics, evolutionary biology, and behavioral theory have converged on a frightening conception of human beings as self-interested, rational, economic individuals living in a world of social Darwinism very much to their liking, a conception that has come to be so widely accepted that it threatens to undermine the traditional conception of humans as moral beings who are obligated to choose the right, regardless of self-interest. … Society cannot hold together, and even the market cannot exist, without conventions of social responsibility and mutual trust.”

Successful market capitalism, which benefits all stakeholders, requires business people to act as fiduciaries rather than out of self-interest. The chief virtue of democratic capitalist societies has been their ability to evolve and become more just. But this virtue has eroded as the narrow view of profit maximization has become ascendant.

Elmer Johnson lamented the diminished role of church and family as moral institutions that balance the market economy: “I believe a society is in a serious state of decadence when its members come to depend primarily on either the market or legal paternalism or any combination of the two for generating and sustaining an adequate ethic. As one who subscribes to the Judeo-Christian tradition, I believe in the primacy of the life of the spirit, in the incredible power of the God-inspired hero, whether he be the famous prophet or statesman or little known teacher or author, to arouse and transform the many from their ignorance and apathy and self-indulgence so that they are enabled to lead lives of freedom and dignity and moral worth. Next to this source of moral power, paternalism and the market are not even poor seconds. While there are many powerful reasons favoring a market order over alternative forms of economic organization, the ultimate justification of a market order is … that it provides a necessary condition to the full possibilities for lives of moral worth, namely the freedom to choose.”

Our society and our nation will be well served if business leaders have the moral courage to continue to speak out, as they did after Charlottesville, but more importantly to pursue Johnson’s charge of moral responsibility in their businesses and personal lives.

William Longbrake is Auburn’s Economist-In-Residence.  

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