Business Ethics Drucker\'s Approach to Business Ethics

Business Ethics

Drucker's approach to business ethics revolves around the belief that business people are rational actors who, as agents for the shareholders, will evaluate all decisions on a cost-benefit basis. His view of business builds upon and only somewhat contrasts with that of Milton Friedman, who in 1971 famously espoused that the "social responsibility of business is to increase its profits." This paper will analyze these two views, showing how they are similar and how they are different from one another.

Although Friedman's editorial has been distilled into its pithy headline, his view on the subject of business ethics was complex. Friedman viewed business managers -- executives -- under the agency theory whereby they would be accountable only to the shareholders. Under this view, managers would and should only focus on enhancing shareholder wealth as the underlying philosophy of their actions. Friedman allowed, however, that the actions under this dictum should still be within the bounds of common ethics. This is essentially a Kantian perspective, where Friedman understands business to be bound by the general ethics that prevail in society -- the categorical imperative -- as defined by the legal system. Thus, the pursuit of profit for Friedman was constrained by the need to adhere to laws and common ethical standards.

Drucker's view was similar to that of Friedman, but with significant and noteworthy alterations. Drucker's view remained rooted in agency theory, in that the executives had a role that was to act as agents for the shareholder. In this role, Drucker posited, business leaders would make decisions "as a cost-benefit calculation." Drucker therefore viewed executive decision-making differently from Friedman in that he viewed such decisions as strictly rational, in the economic sense. Drucker did not subscribe to the idea that these decisions would conform to any public ethical standard, but rather took the view that such decisions were essentially amoral in nature. As a result, business leaders could make a decision that would benefit shareholders in the short run but perhaps not in the long run, a function of the decision to focus rather myopically on short run returns.

One of the key differences between Friedman and Drucker is the notion of common ethics. Friedman believed that a common set of ethics should prevail, even over and above the pursuit of profit. His essentially Kantian view evidences a much different view of the relationship between the business entity and the world than that which Drucker envisioned. Friedman not only viewed the shareholders as a stakeholder, but also understood the role of externalities in managerial decision-making. Friedman was an economic, whereas Drucker was a management scholar, so the notion of externalities came more naturally to Friedman.

Friedman's understanding of externalities gave way to his general understanding of stakeholders. He understood that the rational manager must balance the needs of many different stakeholders. When Friedman wrote his paper, the question had arisen of business' obligations to society. Friedman's response was that while there was some degree of obligation to various internal and external stakeholders, the most important stakeholder remained the shareholders, as they had their money in the game, so to speak. Yet the implication, policy wise, is that Friedman argued that if certain specific externalities are not addressed, the shareholders will suffer. Friedman was arguing against charitable contributions from business, which was a hot button issue at the time. However, Friedman's point was in a general sense that once the most important stakeholders -- the shareholders -- were taken care of, the other positive societal outcomes would fall in line.

Drucker understood this as a basic worldview. He explained it in terms of rational actions taken on the part of managers, that these actions were undertaken as the result of cost-benefit analysis. This view reveals a fundamental flaw in the reasoning of both Friedman and Drucker -- that managers are purely rational entities and act purely in an agency role. Drucker's interpretation was that managers' reactions to stimuli would specifically relate to a cost-benefit analysis, presumably with the shareholder as the beneficiary of the action. The problem with this view is that the shareholder is not always the intended recipient of the outcome that the managers are seeking. This provides a complication, especially for Drucker, as the assumption of rational decision makers is threatened by the myriad irrational influences that decision makers must face every day.

Yet, Friedman's view acknowledges that there are many different stakeholders for any given corporation. Drucker's argument fails to acknowledge the wide range of stakeholders. However, these other stakeholders are relevant in Friedman's worldview, even if it is only with respect to how they affect the firm's profit. Violations of the prevailing societal ethic are assumed by Friedman to have generally a negative impact on the firm's profit.

There are a wide range of stakeholders that impact on business decisions. The government has the most direct influence on these decisions, as it can instill rules on corporations, constraining their activities. A firm's customers also have an impact on business decisions, because customers control the demand function. Any firm must understand the relationship between the actions it undertakes and the demand for its products. The actions of employees also impact on profitability -- for example FedEx has worked to keep employees happy because it fears unionization. Thus, the company must consider the employees as a valid stakeholder if it is to pursue the profit motive. There are any number of other potential stakeholders as well for the majority of businesses.