First Pages

Introduction: How to Be Profitable and Moral

Bob Miller, CEO of a software development firm, was flying back from Bangalore, India, where he had been setting up a software programming facility for his company, the San Jose-based Software, Inc.  Everything had gone quite smoothly, despite some bureaucratic delays. With the help of an Indian agent, Bob had secured a lease in a new building in an industrial park at a fraction of the cost of leases in San Jose. He had also hired ten young, well-trained software engineers who were eager to work for salaries of about one-fifth of their American counterparts. This would really give Software, Inc. a critically needed advantage in terms of cost and speed of development in the highly competitive software market.

However, as satisfied as Bob was with this move, there was an unpleasant side to it: he would have to lay off twenty software engineers in San Jose, some of whom had been with the company for several years. Despite the fact that Software, Inc.’s severance packages were fair and the company paid for outplacement services, Bob was still wondering how to decide if this was the moral thing to do. There had been discussions in the media lately lamenting the morality (or a lack thereof) of “offshoring” high-tech jobs from America to developing countries, and activist groups were calling for a ban on the practice. Bob was concerned about the potential media backlash against the layoffs. But what really made him uncomfortable was the thought of having to let go of twenty loyal, productive engineers. He knew many of them personally, having worked alongside them in the early days of Software, Inc. As the plane started to prepare for landing, Bob was formulating a plan for handling the terminations and answering potential critics.

Questions 1.1:

What would you do if you were Bob Miller, and why? In order to handle the situation ethically, Bob Miller should:

  • let the ten best engineers go, as they have the best chance of finding new jobs, and keep the weakest performers, as they need their  jobs the most,
  • keep all the engineers in San Jose but also hire engineers in India—all of them need jobs—and advertise this as corporate citizenship,
  • terminate some engineers in San Jose, hire some in India, in order to keep everyone’s “interests” balanced,
  • instead of offshoring jobs, find other ways of cutting costs, such as skipping quality control,
  • rank the engineers based on performance, and let go ten of the lowest ranked.

See Answers 1.2 for solutions.

Which Ethics?

How should Bob Miller deal with the situation? In particular, how should he handle it in a way that would allow his company to prosper and be just to people who have contributed to its success in the past?

Concerned about the morality of terminating loyal employees and the hardship it would cause to them, and wanting to act ethically, Bob Miller decided to find out what advice business ethics consultants had to offer. The first consultant he asked—a professor of philosophy at a well-known university—told Bob that his company owes a duty to his current employees and must provide them jobs, particularly as the economy was stagnating. In such economic conditions, the weakest performers could have difficulty finding new jobs. Software, Inc. should demonstrate “corporate social responsibility” by providing employment to those in need. The second ethics consultant took a more global perspective and argued that Indian software engineers also needed jobs. And since they were less well-off than their American counterparts, Software, Inc. could truly show corporate citizenship by hiring software engineers in India as well—but without terminating any engineers in San Jose. That would of course forfeit the original purpose of the offshoring initiative—competitiveness and profits—but such selfish motivations should be replaced by corporate social responsibility: giving back to society, by providing jobs to people who need them.

The third ethics consultant’s suggestion followed the very popular “stakeholder” approach: instead of seeking to maximize long-term profitability, Bob Miller should compromise and try to balance the interests of all the stakeholders of his company: the shareholders, the employees in the United States, the new employees in India, customers, the critics of offshoring, the media, etc. A stakeholder is commonly defined as “any individual or group who is affected or can affect the corporation.” By this definition, just about anyone can claim to have a stake in a firm and argue that their interests should be served by it.

However, the stakeholder approach does not give any specific advice as to how the various stakeholders’ interests are to be balanced, leaving Bob with no concrete proposal. Based on this consultant’s advice, Bob should compromise some profits and continue employing at least some of the engineers he had planned to terminate in San Jose, to keep the critics of offshoring and the engineers happy—temporarily, as his company cannot afford this option in the long term. But Bob cannot sacrifice profits too much, as that would make the shareholders unhappy. Software, Inc. needs their investment to survive and thrive. So Bob has to offshore some jobs to maintain profits, but perhaps he can compromise on the number of jobs to be offshored. Instead of offering competitive prices, he has to raise them, but he can try to placate customers by telling them that they are supporting a socially responsible company that employs American engineers while competitors have moved their operations to lower-labor-cost countries.

The advice from all three ethics consultants is based on the same moral code: altruism, the predominant view in ethics, both historically and around the world today. Altruism prescribes sacrificing one’s own interests for those of others. Egalitarianism, a particular form of altruism and the basis of the stakeholder approach described above, tells us to sacrifice to those who are less well-off than we are, in order to “balance everyone’s interests” and to achieve equity. The owners of Software, Inc. should sacrifice profits because the software engineers need jobs. [A text box summarizing altruism inserted here.] By the code of altruism, business is guilty from the outset—because profit-making is selfish. The only way business can redeem itself morally is to atone by sacrificing profits and “giving back” to society in general and to any particular claimant.

Bob Miller considered the ethics consultants’ advice, as he really wanted to do what was right, both for his company and for his employees. He was baffled that most of the advice was incompatible with his goals: maximizing long-term profitability and treating his employees justly. He had thought that ethics would provide him the guidance he needed. He could not see achieving cost competitiveness by retaining all the software engineers in San Jose (and also hiring engineers in India, as per the second consultant’s suggestion). Following the consultants’ advice, his company could remain competitive only if his competitors also adopted the same advice: they would all be compromising their profits. But how could Bob be sure that all his competitors would follow the same advice, now and in the future? And since the advice is general—sacrifice profits for the sake of others—how do you decide how much to sacrifice, and for which stakeholder groups? Altruism offers no advice on that, and Bob Miller could see that those competitors who would sacrifice the least would be the “winners”—if any kind of sacrifice could be called “winning.” Bob made up his mind: he was not interested in competing for the “least amount of sacrifice” as that would not help his company survive and prosper. Altruism did not provide him the moral advice he needed for long-term success.

Bob was also not able to see how the consultants’ advice would be just to his employees. The consultants argued that it was his duty to maintain existing jobs while also creating new ones. But how could that benefit his existing and new employees, when Software, Inc. would not be able to compete with its much higher labor costs? If the company was not profitable, it could not provide any jobs at all!

Bob Miller rejected altruism as untenable—but he still did not have a moral justification for the offshoring decision or guidance for handling the terminations. He was briefly tempted to agree with some fellow CEOs who, like him, had rejected altruism as incompatible with business success. His peers had then concluded that morality does not apply to business, and therefore any action that seemed to work at the moment was acceptable—the ends justifying the means. For a moment Bob contemplated alternative ways of improving his company’s competitiveness so that he could retain his loyal employees. Perhaps Software, Inc. did not have to offshore software development to India after all? There would be some penalty for getting out of the lease and the employment contracts, but if Bob could find another way of cutting costs, he could avoid the painful tasks of laying off engineers at home and having to answer the critics. He could, for example, eliminate the costly quality control function altogether and keep his prices competitive and bottom line respectable. Wasn’t this a case where the ends (long-term profitability and retaining loyal employees) justified the means (deceiving customers by skipping quality control)?

It is easy to agree with the argument that if being moral means self-sacrifice, then morality cannot provide any guidance for business firms. It is also easy to make the erroneous conclusion that if the altruist morality does not apply to business, then we can pursue profits by any means we choose even if such means involve exploiting others, such as deceiving customers about the quality of our products or investors about the company’s prospects. Such a view of ethics as subjective, doing whatever one feels like (and can get away with), is called cynical egoism. [A text box on summarizing cynical egoism inserted here.]

Bob Miller’s temptation to adopt cynical egoism as his moral code and exploit his customers was short-lived, however. He quickly caught himself and realized that the plan for achieving cost savings by deceiving customers was not workable in the long run. The customers would soon find out, and the reputation of his company, for which he had worked so hard, would be severely damaged—possibly permanently. The ends never justify the means—you cannot get to legitimate ends through immoral means.

Bob has now rejected the two moral codes proposed to him so far: altruism—the prescription for self-sacrifice he received from the three ethics consultants—and cynical egoism—the predatory code that some of his peers saw as the only alternative to altruism. He sees both codes as incompatible with his goals. All he really wants is long-term profitability for his company and fair treatment of his employees. How does he know that offshoring jobs to India is the right decision? He is feeling frustrated and confused; he had always believed that ethics should help people make difficult decisions and to achieve their goals. All he has heard so far from the consultants is that being ethical and profitable at the same time is not possible and that when facing that kind of a clash, he should sacrifice profits. He decides to seek out one more ethics consultant, and this time he gets a different answer. The consultant affirms Bob’s belief that business must pursue its self-interest, not sacrifice itself or others, if it is to survive and flourish. He tells Bob that offshoring jobs to India and terminating employees in the home country is moral, that pursuing profits is moral and that there is a moral code that shows how to achieve profits in an ethical way. That moral code is rational egoism.

Rational egoism (egoism, hereinafter) rejects both altruism and cynical egoism as antithetical to success in business. Competitive pursuit and achievement of profits require putting the company’s (its owners’) interests first, without sacrificing anyone. Egoism is the moral code that tells us that the pursuit of rational self-interest—including profitability—is moral, and shows how we can do it. Egoism holds, in fact, that following a proper morality leads to long-term profitability. Bob Miller thinks he has found the right consultant, and wants to learn more.

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