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Business Ethics Integral to Corporate Strategy, says Stanford's Malhotra

Professor Neil Malhotra of the Stanford GSB focuses on business ethics and non-market strategy. Last week, we discussed the increased emphasis on ethics training within Stanford's curriculum. Today, we'll talk about what kind of approaches will be most effective in driving home the importance of ethics to future business leaders.

BNET: How is the mindset of students and young business people changing when it comes to ethics?

Malhotra: Well, because of the economic crisis and the attention paid to ethics now, I think there's been a good reaction and a bad reaction. I think most of this crisis was caused by an emphasis on instant gratification. One reaction to an overemphasis on instant gratification is to structure our corporations such that we don't fall into that trap. Some companies are so obsessed with quarterly earnings they employees force employees to reach unrealistic quarterly benchmarks where other companies take a longer-term view. Those short-term views are very problematic; that causes a lot of incentive problems. But a number of people have the opposite reaction: you don't know when you're going to have good economic times again. You need to get yours while the getting's good.

BNET: Do you think business schools are doing enough on the ethics front?

Malhotra: I think that the quantity is less important that the quality of the education. Most business schools have some required ethics class, but a lot of students haven't taken it seriously--maybe they don't like to be there.

Harvard Business School has done this thing with the MBA pledge on ethics. It's a nice gesture, but I don't think it's going to cause anyone to be ethical. Either people who were going to behave ethically will self-select into it, or potentially, more dangerously, it's going to provide cover for people who might do unethical things. They can say, "Well, I signed the pledge. I must be doing the right things; I'm an ethical person." So I think this MBA pledge at Harvard is potentially more dangerous than it seems on the surface.

Reframing ethics away from "we can tell you how to be good people" to "this is how you strategically manage an organization where people are looking out for their own interests" is maybe a better way to do things. Business school students are very concerned with strategy; building an understanding [within the students] that ethics is an integral part of corporate strategy might be the way to go.

BNET: Ethics as central to overall corporate strategy--is that conventional wisdom or is that a new approach?

Malhotra: I don't know if it's conventional wisdom. I don't think all of the students understand it, because I think a lot of students think, "Ethics is a constraint on profits." A lot of corporate social responsibility is taught as a part of marketing, which is kind of simplistic--but I think it's fine. The bigger concern with ethics, though, is a lot of these firms [who did not pay enough attention to ethics] just don't exist anymore, potentially because some practices were unethical. Lehman Brothers doesn't exist. Enron doesn't exist because some practices were unethical. We're saying that managing people in an organization is very difficult if you only view them as contributing labor to the production function. You would be ignoring that they are human beings who are fallible and sensitive to incentives. Behavioral economists have known this for a long time--there's been a long concern about what incentives do. If you say to loan originators "you get more money the more loans you originate," is that going to induce unethical behavior? So, when considering people's market-based decisions, we need to think about the non-market consequences of them.

Next week, we'll discuss another of Professor Malhotra's interests: "non-market strategy." He contends future business leaders need a broader array of capabilities for managing the complex world of activists, government officials, the courts and the media.