Chapter 2

The ethical perspective

2.1 Introduction: morality, ethics and principles

Morality is commonly described as discerning what is right or wrong, and defining the practices and rules, written and unwritten, that are intended to guarantee responsible conduct and behavior among individuals and groups. The aim is to maintain or enhance the common good. That same definition is very frequently used for ethics. If we take the example of one prominent source (Kidder 2003, p. 63), the notion of ethical also translates to what would be termed moral when it comes to behavior and conduct. There is no remedy against this interchangeable usage of ethics and ethical with morality and moral, and this is deplored by even the most well-known encyclopedias, such as The Cambridge Dictionary of Philosophy (Deigh 1999). However, this book will try to differentiate: morality is about doing good, while ethics¹ is about why we do good, that is, about the criteria under which the rules for doing good (for what is good and what not) are determined and selected. These criteria then transform into the categories for evaluating the structure of modern societies (see Lütge 2005).

The issue is not just theoretical: moral conduct cannot be performed without a foundation; it has to be based on principles. And in practice, leaders who act on principles will be in a much better position to make their followers understand moral conduct than those who just abide by rules.

Comprehending principles-based leadership requires an appreciation of what is meant by principles in this context. When the concept of principles-based leadership was introduced by Stephen R. Covey in the 1980s (he used the expression principle-centered leadership: see Covey 1989), quite a few management principles had been in place for a long time, but they merely described determinants of managerial activity:

Here again, we have a two-level phenomenon like morality and ethics. Achieving the objectives of the enterprise is the operational level, and one level up are the guiding patterns, which are overriding principles like natural laws that go without saying and are absolute. They are manifest in the form of values, ideas, norms and learning, but while these manifestations may be subjective and internal to an organization, the overarching principles from which they derive are objective and external, no matter what the conditions of an organization.

According to Covey, four such overarching principles are core in professional and personal life: security, guidance, wisdom and power (Covey 1989, p. 20). Each of these refers, in essence, to the relation of the individual with himself or herself or with others – and they are recast in the workplace through the quality of being worthy of trust (at the personal level), trust (at the interpersonal level), control (at the managerial level) and alignment (at the organizational level). The human centered paradigm connects closely with these elements of leadership, as they all focus on interactions between people.

If we wish to build a strong foundation for moral principles, we need to dig deeper. We need to uncover the prerequisites for apprehending how these principles can turn into guiding patterns for human centered management. One prerequisite is the agenda set by the philosophy of ethics; another is the logic that engrains morality and competitive behavior in the capitalist society; and the third is the cognizance of how these two translate into practice.

Dealing with the philosophy of ethics is becoming a fundamental subject for leaders and managers. This is on the grounds that it develops managerial wisdom, deepens one’s understanding of the complexity of management life, and improves creative and critical thinking skills (Chia and Morgan 1996; Small 2004). This was true throughout history. Going far back, we find Marcus Tullius Cicero (106–43 BC) saying that anyone who wants to become a leader should embrace philosophy (Schütrumpf 2014). The words of this Roman statesman, lawyer and member of the senate were taken literally by one of the Roman emperors, Marcus Aurelius (r. AD 161–180). Marcus Aurelius’s Meditations, written between 170 and 180, are still revered by many as a literary monument to a philosophy of service and duty, describing how to find and preserve equanimity in the midst of conflict (Grant 2011). We do not know of any other emperor or king, Roman, German, British or French, who was his like. However, some of the early US presidents were; Fornieri (2014) contends that Abraham Lincoln’s political genius is best understood in terms of a philosophical statesmanship that united greatness of thought and action, one that combined theory and practice, and displayed six dimensions of political leadership: wisdom, prudence, duty, magnanimity, rhetoric and patriotism. So any contemporary leader who sets a good example by applying philosophical wisdom is in good company.

The next section is an excursion into the philosophical background of our topic, which might help to arouse more interest among leaders and future leaders to study ethical reasoning.

2.2 The prerequisites: setting an adequate philosophical agenda

An agenda for morality in leadership, one that appeals to practitioners, cannot be construed without considering how the view on what a leader is has evolved over time. Let us go back, first, to the admirals of the Roman Empire’s navy, whose stance was navigare necesse est, vivere non est necesse (“navigating the ship is of the essence, human lives are not”).² Fifteen hundred years later, Niccolò Machiavelli committed to paper what were his reflections on the nature and effective exercise of power. The ideal Machiavellian leader exercises power in the service of the security, glory and expansion of his reign. Machiavelli does not argue that in normal circumstances one should abide by current morality and only resort to immoral means when they are needed to preserve the state. What he states is that these measures are quite normal and are a regular condition of political life. Machiavelli’s The Prince was written in 1513 for the instruction of the Medici, who ruled Florence at the time, but it has become one of the best-known essays in the history of political philosophy (Machiavelli 2001). Machiavelli’s ideas about power and leadership, though rooted in a specific time and place, have also been reformulated and reinterpreted to apply to power exerted by contemporary business executives (see, e.g., Galie and Bopst 2006; Ciulla 2013).

Machiavelli’s writings were a reaction to what had been upheld by Christian philosophers such as Thomas Aquinas (1225–1274) (see Fathers of the English Dominican Province 1952), that questioning obedience to those in authority was immoral because God had given them power. Machiavelli’s leaders acquire power by virtue of their abilities and through the skillful application of knowledge, control and the capacity to win (war), and their goal is “to create and maintain a strong and well governed social whole” (Galie and Bopst 2006, p. 237).

Following the perceptions of Macchiavelli, Thomas Hobbes (1588–1679) defines the power of leadership to be “the present means for achieving some future apparent good and thus defies the notion that what is good can be authoritatively known” (Friedrich 1961, p. 3). But even if Hobbes sets out from a position which claims that morality, i.e., defining what is good or evil, depends on the nature of one individual (leader), and as he or she changes, good things may become evil and evil things good – with which Hobbes gets to the point that morality should in the end be dependent on the happiness both of the individual and of others (see Frost 2008). From the insights of Hobbes, subsequent theorists of the 1700s and 1800s started to embrace a view that replaced purely egoistic motivation by the quest for outcomes that are more altruistic, like utilitarianism or duty-based reasoning (known as deontism, from the Greek word deon for duty). Utilitarians deem that an action is good if it benefits the greatest amount of people, and deontists deem that an action must be ruled by consequent moral judgment on the actor.³

The rise of the utilitarian principle did not really have an immediate impact on leadership behavior because the prevailing type of governance in the 1700s and 1800s was absolutism; likewise, the posture of the Roman admirals was adverse to what had been developed by the Greek philosophers of the time. Aristotle (384–322 BC) claimed that acting bravely alone is not sufficient for a leader to have normative moral and political weight (Nussbaum 1992; Burger 2008). Moral virtue, according to him, encompasses courage, temperance, justice and prudence. And even though this scheme was taken up and elaborated further by prominent Christian philosophers such as St. Augustine and St. Thomas Aquinas (see, e.g., MacIntyre 1988), Machiavelli’s portrait of the prince seems to have been the predominant leadership model throughout the centuries. If we look at four contemporary business leaders and what they have said about leadership, we still find an authoritarian posture in one of them (Bardy 2002):

• Jack Welch (General Electric), stressing speed, simplicity and confidence:
  • “Create a vision and relentlessly drive it to completion!”
  • “Have self-confidence and self-assurance – be critical!”
  • “Make the customer drive the corporation!”
  • “Sustain integrity and live with the law’s letters and spirit!”
• Helmut Maucher (Nestlé), stressing keeping the company alert:
  • “Select and recruit people who have a broad span of interest and who can understand the overall context … as they rise through the organization.”
  • “Every leader should be asking: What do I add?”
  • “My biggest worry is that they’ll think they know all the answers.”
• Juergen Schrempp (DaimlerChrysler), stressing personal involvement:
  • “I am the architect of this global automotive company and I want to see it through.”
  • “I will consult the committees and then I will take a decision.”
  • “I wish to demonstrate that what I’ve said … comes to fruition.”
• Reinhard Mohn (Bertelsmann), stressing the rules of sociability:
  • “Society must integrate and reward.”
  • “Shared values allow freedom.”
  • “Open dialogue is better than formal discussion.”
  • “Exercising one’s rights requires discipline.”
  • “Society is governed by reliability.”
  • “Society must teach sociability.”

In each of these statements, the emphasis lies on very different aspects of leadership. This may be due to the different personalities and abilities of the four leaders, but there is more. Leadership research has focused on leaders’ abilities for a long time, trying to demonstrate what causes successful leadership: energy, intelligence, dominance, self-confidence, sociability, openness to experience, task-relevant knowledge and emotional stability, to name the most important (see Yukl 2010). What can be seen in the statements of those four leaders is that authoritarian characteristics are just but one of the features.

While from the Roman admirals to Machiavelli’s prince to Juergen Schrempp’s autocratic, even narcissistic leadership at DaimlerChrysler (Oesterle, Elosge, and Elosge 2016), there has not been much substantial change, having other models besides authoritarianism would mean that nowadays we have a significant range in the notion of what leadership should be. What has also changed between the time of the Roman admirals and today’s understanding are the contexts: philosophy and society are intimately intertwined today, and the individualism that prevailed in past centuries is now but one track of philosophy. The other change in context is the prevalence of an economic footing in all that relates to modern life. This was recognized as early as 1905 by Max Weber in his famous study The Protestant Ethic and the Spirit of Capitalism. Weber writes:

These two present-day societal and economic contexts of ethics and philosophy in general will be presented in what follows.

2.2.1 The societal context

History shows that in spite of Aristotle’s call for balancing courage, temperance, justice and prudence and in spite of the early Christian philosophers’ moral teachings, and contrary to utilitarianism and deontism, the figure of what constitutes a leader was much like the Machiavellian prince until well into the 1800s. For Aristotle, the answer to the question of what is the essence of life was to serve others and to do good. And Cicero noted that “Men were brought into existence for the sake of man that they might do one other good” (cited in Trompenaars and Voerman 2009, p. 6). The centuries that followed the fall of the Roman Empire well into the beginning of the Enlightenment did not take up this viewpoint. There were the great 5th-century writings of St. Augustine, who demonstrated the need for moral action (see, e.g., Loriaux 1992), but they did not motivate the leaders of his time or afterwards. It was not before the French Revolution and similar societal movements on the European continent as well as the drawing up of the US Constitution that changes came up. Still, one century before that time, it was the English philosopher Thomas Hobbes (1588–1679) who claimed that a moral leader should in the end pursue not just his own contentment but that of others, too. This may sound unfamiliar because Hobbes’s theoretical work is mostly seen to be an attempt to defend philosophically the power of the English king and the general structure of the English monarchy.

Hobbes’s writings must be judged from the historical background. His texts were written during the English Civil War, which broke out in 1642 when Hobbes lived in France in the company of the exiled royalists, and his theory of civil government is influenced by what he saw as a political crisis resulting from the war. Hobbes compared the state to a monster (“Leviathan,” which is the title of his most famous work published in 1651) composed of men, created under pressure of human needs and dissolved by civil strife due to human passions: “Were it not for political community, people would have to fear death, and lack both a commodious living and the hope of being able to obtain it” (cited in Stanford Encyclopedia of Philosophy, 2014, entry “Hobbes’s Moral and Political Philosophy”). Political community, as Hobbes means it, would then arise from “people acceding to a social contract and establishing a civil society under the auspices of a sovereign authority (the king), to whom all individuals in that society cede some rights for the sake of protection” (Hobbes 1651/1996, p. 117).

Hobbes’s development of what has come to be known as social contract theory, that is, justifying political arrangements by agreements made among suitably situated rational, free and equal persons, has laid the ground for subsequent work in political philosophy ever since his death. While his own conclusion was that we ought to submit to the authority of an absolute sovereign power, his philosophy gives an answer to the question of what holds human societies together. And it is all about leadership when he argues that people seek protection under royal authority, because he also upholds that this authority is legitimate only when it can effectively protect those who have consented to obey it; political obligation ends when protection ceases (Peacock 2010).

The core of Hobbes’s social contract theory, which is still of relevance today, is that this contract establishes (ethical) norms in order to fulfill the interests of all members of a society – which straightly connects to the human centered paradigm. From there, we also have a clear path to bring the ideas of Immanuel Kant into modern conditions: people constrain themselves – autonomously, but collectively – by rules, for the sake of greater benefits. The condition for this is the consent of all others. And it does not matter if they constrain themselves under the authority of a ruler or under the authority of commonly accepted rules. But before looking at this Kantian autonomy and how it relates to other contemporary features of Kantian philosophy, the utilitarian approach needs to be examined as it is somehow positioned between the contractarian and the rules-based approaches.

The utilitarian school of thought, though mostly ascribed to Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1873), was originally founded by Richard Cumberland, an English clergyman (1631–1718) who argued that humans, by nature, are not wholly selfish but basically altruistic. For the theological utilitarians, promoting the happiness of others was necessary because it was approved by God (see, e.g., Albee 2014). For Bentham, it is about the consequences of an action: the welfare of a group – of society – determines if an action (the decision of a leader) is good or bad. This, then, takes on the tinge of relativity: goodness and evil become qualities of acts or decisions relative to the situation in which they are performed. Consequentially, the measure of good has to be in terms of “the greatest good of the greatest number.” So, one must ask of a decision if it will bring the greatest good (“utility”) to the greatest number of individuals.

Businesspeople feel most at home using the ethical foundation of utilitarianism (Cavanagh 2006), as it focuses on results: when utilitarianism evaluates actions on the basis of their outcomes or consequences (hence the term consequentialism), it considers any action that would result in the greatest net gain for all concerned parties to be the right, or morally obligatory, action. This comes close to the modern term of stakeholder orientation. And just as there are criticisms of stakeholder theory (e.g., that because of the many different and competing interests or the diffuse utterance of interest someone must have the power to prioritize, which may jeopardize fair treatment of all interests), there are also criticisms of utilitarianism: it ignores justice, it may instigate favoritism, calculating utility is self-defeating, consequences of decisions for all that they affect are inherently unknowable and so forth. But the moral foundation of utilitarianism will certainly always remain a helpful guideline for ethical decision-making.

Finding a helpful guideline for ethical decision-making was also the objective of Immanuel Kant. His answer is the categorical imperative, where categorical means unconditional: “Act only according to that maxim whereby you can, at the same time, will that it should become a universal law” (Kant 1785/1993, p. 30).⁴ To some extent, this arose from his dissatisfaction with utilitarianism, the popular moral philosophy of his day, believing that it could never surpass the level of hypothetical imperatives. Kant argued that when a utilitarian says an action is wrong because it does not maximize good for those involved, this is irrelevant to people who are concerned only with maximizing the positive outcome for themselves. Consequently, hypothetical moral systems cannot be regarded as bases for moral judgments against others, because the imperatives on which they are based rely too heavily on subjective considerations (Rachels 1999).

Very often the categorical imperative is viewed as a philosopher’s rewording of the moral standard that is considered to be universal: the Golden Rule. This rule can be found in all major religions and teachings of wisdom. Shermer (2004, p. 25 f.) enumerates 20 sources, from Leviticus 19:18 in the Holy Bible to La Morale Anarchiste of Peter Kropotkin (1889/2006). The Golden Rule expresses the idea of reciprocity, although often in a negative way. For instance, the fundamental text of Hinduism, the Mahabharata, states: “This is the sum of duty: do not do to others what would cause pain if done to you” (see Suchanek 2008). A more colloquial version is “Don’t do things you wouldn’t want to have done to you.” The positive formulation can be found, for example, in the Holy Bible at Matthew 7:12: “Therefore all things whatsoever you would have men do to you, do you even so to them.”⁵

Kant’s reasoning, however, is not about reciprocity. Rather, the categorical imperative is an attempt to identify a purely formal and necessarily universally binding rule on all rational agents. The Golden Rule, on the other hand, is neither purely formal nor necessarily universally binding. It is empirical in the sense that applying it depends on providing content, such as “If you don’t want others to hit you, don’t hit them.” Also, it is a hypothetical imperative in the sense that it can be formulated, “If you want X done to you, then do X to others.” Kant feared that the hypothetical clause, “if you want X done to you,” remains open to dispute (Flew 1979). He wanted an imperative that was categorical: “Do X to others.” Hypothetical was not what Kant was about: he knew he needed empirical facts to make moral judgments. This is why his ethical theory can be applied to issues in the real world, as agreed upon by almost any practitioner and most contemporary philosophers, while the Golden Rule cannot (Herman 1993; Stroud 2002).

The problem with the Golden Rule is, stating it bluntly, as Albert Carr did almost 50 years ago (Carr 1968, p. 155), that so long as you accept (or you have to accept) that others treat you in an immoral way, it seems as if you are allowed to treat them immorally as well. In the business world, where being faced with promises that are not kept and being deceived is not uncommon, wouldn’t the Golden Rule mean that it is morally acceptable to deceive and cheat on one’s own side as well? By contrast, Kant’s stance shows that Carr’s view is morally wrong because it is contradictory: if all members of a society made promises without an intention to keep them, promises would never get made. And no one would enter into an agreement if he or she believed the other party had no intention of honoring it.

It is the expectation that promises are honored which holds a society together – as is the prospect that one may possess private property and transfer it. These two principles are also fundamental to any social contract by the definition of Thomas Hobbes. They are sustained by all moral theorists, from David Hume (1711–1776), a contemporary of Kant, to Friedrich August von Hayek (1899–1992), whose 1944 book The Road to Serfdom is said to have been lying permanently on the nightstand of George W. Bush. Bush awarded the Presidential Medal of Freedom to Hayek in 1991. The Road to Serfdom is about the “Errors of Socialism,” and von Hayek used this as the subtitle of the last book he wrote (The Fatal Conceit; Bartley 2011).

If we just take the two criteria mentioned previously (fulfillment of promises and property rights), we can easily understand why the socialist systems in communist countries fell apart when their regimes fell. With the two principles, we also have an answer to what might be the “social glue” or moral capacity that the citizens of a society have for keeping their society stable. But, as the fall of communism has shown as well, in our times the economic conditions also impact the stability of a society. This has given rise to an attempt at rethinking ethical concepts through applying a methodology that is used in economics. The approach that was developed by Homann (2006b) deviates from Kant’s emphasis on grounding moral norms and rules in reason. Instead, it favors an economic grounding of moral rules and looks at calculations of advantage and disadvantage. Before discussing this concept in section 2.2.3, we need to explore what theory has in place to connect the societal level to the individual level of ethical rationale.

2.2.2 Societal and individual rationales

Moral philosophy assumes, as we have seen, that the “social contract,” encompassing the principles of property rights and of honoring promises, ensures responsible and moral behavior of the members of a society towards each other. From there, moral philosophy looks at the motivations for moral behavior that are intrinsic in an individual. This will be considered here through Kwame Anthony Appiah’s reflections on the five modes of response underlying moral sentiments (Appiah 2008, pp. 126 ff.). They all relate to business life. The first mode is compassion, or the concern mechanism, where individuals intrinsically aim to minimize suffering of others. The second mode is reciprocity, which combines fairness and gratitude. The third has to do with attitudes such as respect and contempt; they are attuned to status in social groups. The fourth is anchored in an individual’s capacity for disgust, e.g., for open violations of social order, and the fifth is about belonging to a community – the in-group/out-group distinction.

Anyone working in an institution and reaching out to stakeholders will confirm that these five modes of morality are densely interwoven in management life. They should induce managers to act morally. But management in real life also tells us that there is fraud and conspiracy, negligence and disrespect, to name just a few features of immoral behavior. Just as there are moral managers, there are also those who act irresponsibly – and on the corporate level there are those that act with social irresponsibility (Lange and Washburn 2012). Society will have to find a way – and has indeed found it, as will be set forth at the end of this section – to ensure that these wrongdoers get reprimanded, more or less automatically, by the markets in which they commit immorality.

There are two other individual-level motivations for moral behavior (which may also influence the behavior of society as a whole), and they are spirituality and culture. Both offer guidance on personal responsibility and service to others. The issue of culture will be dealt with in Chapter 3. At this stage, a quick glance will show what the world’s major religions reveal about responsibility to others – the spiritual dimension. The word spiritual means relating to the spirit rather than the material. The question must be asked, when increasing numbers of people are describing themselves as spiritual while at the same time not identifying with any particular religion (Saad 2013), whether religion and spirituality exist separately. But let us first look at the foremost teachings of the five world religions addressing morality.

Christian tradition uses the language of the duty to love one’s neighbor to speak about responsibility to the other. The Ten Commandments from the Old Testament delineate basic guidelines for human action and set out the particulars of the duty to love one’s neighbors by prohibiting murder, adultery, lying, stealing and envy of a neighbor’s property. In the present-day Catholic Church, Pope Benedict XVI and Pope Francis have spoken at length about this duty. In his encyclical Deus Caritas Est, or God is Love, Pope Benedict describes how love of neighbor flows from love of God, and how this love is the fulfillment of justice (Pope Benedict XVI 2005, 1, 8, 18, 28–29). With regard to Protestant denominations, the common view as expressed by Mark A. Noll (2011, p. 5) is that “the message of salvation … encourages believers in self-sacrificing service to fellow humans.” This reaches way beyond altruism, which does not necessarily have a faith base, as will be clarified when exploring the meaning of self-interest within the context of the moral market. But while self-sacrifice may go to extremes that cannot be expected in circumstances of daily life, sacrificing one’s personal convenience to the benefit of a someone less fortunate is (hopefully) commonplace among Christians.

Both the Roman Catholic and the Protestant religions have a say in business ethics: Weber’s Protestant Ethic and the Spirit of Capitalism (1905/1976) has been mentioned already. The counterpart is Catholic Social Thought. The social teaching of the Catholic Church is guided by four permanent principles, which are the common good, solidarity, subsidiarity and respect for the human being (US Catholic Bishops 1996). From there, a list of imperatives has been listed that all revolve around the attainment of providing justice to humans in society (see Hornsby-Smith 2006, pp. 104 ff.):

1. 1 The economy exists for the person.
2. 2 All economic life should be shaped by moral principles.
3. 3 A fundamental criterion for any economy is, how are the poor faring?
4. 4 All people have a right to the necessities of life.
5. 5 Working conditions should be decent.
6. 6 People have the responsibility to work.
7. 7 The free market has clear advantages, but governmental supervision is needed to preclude abuses.
8. 8 Society has a moral obligation to pursue economic justice.
9. 9 Workers and managers and owners are moral agents in economic life. By their choices they enhance material well-being and social justice.
10. 10 We have a moral responsibility for the global economy.

This enumeration is human centered per se: humans are the object of what the teachings of any Christian church expound. It has been found, though, that Orthodox Christianity has a tradition that leans more towards the liturgical than the predicament (West 2002), and from there socio-economic teaching and the concept of the social responsibility of business, in particular, are considerably less developed in the Orthodox tradition than in Catholic or Protestant social thought (Lukin 2008). Nevertheless, in 2000, the Archbishops’ Council of the Russian Orthodox Church published a document titled The Foundations of Social Doctrine (http://www.mospat.ru/chapters/conception), of which two sections, “Work and Its Fruits” and “Property,” address economic questions.

Another document, specifying the papal doctrine further, is The Code of Ethical Principles and Economic Rules, which was passed at the Fourth Global Russian Peoples’ Council (published in Pravoslavnaya Beseda Journal 2/2004). Both documents are regulatory, including passages such as “The Church grants its blessing to any work/professional activities that serve the good of people, if the work does not contradict Christian moral standards,” and “it is God’s commandment to those who work to take care of those who, for whatever reason, cannot provide for themselves – the disadvantaged, sick, foreigners (refugees), orphans and widows – and share with them the fruits of one’s labor” (Fourth Global Russian Peoples’ Council, p. 2).

In Judaism, the theme of deep, internalized responsibility to others is strongly present all over. There is one passage in the book of Leviticus (19, v. 18) – “And you shall love your neighbor as yourself: I am the Lord” – where, “neighbor” can be understood as meaning “fellow citizen,” implying that love and consideration ought to be shown to those in one’s own community. While once this passage may have referred to only those who belong to the Jewish community, this has developed over time to include all human beings, regardless of their religion or community of origin (Lipinski 2007, p. 227). In business transactions, Jewish dealings, for example in the diamond world, are often concluded with the words “Mazal oubracha,” which is “luck and blessing.” More specifically, merchants risked being outcast if they did not honor a contract.

Islam emphasizes responsibility to others by both stressing “good” conduct towards neighbors and travelers and also making charitable giving a religious obligation (Sardar 2007). In the Hadith, which is a set of sayings of and stories about Mohammed and a major source of Islam’s ethical teachings, there are several passages that stress the importance of justice and injustice to correct behavior: “Justice is the cause of righteousness and peace and of the existence of all forms of life in the world. Injustice is the cause of discord, dis-peace, destruction and ruin” (Sialkoti 1984, p. 78). But it was also found that traditional Islam is more “tribal” in the sense that responsibility to others largely focuses more on those within the Muslim faith than those without (Haidt 2012, p. 140).

Regarding the business world, Islam is often perceived to be an impediment to business, with the economies of most Muslim states underdeveloped and only five out of the Fortune Global 500 leading companies by market capitalization based in the Islamic world (Wilson 2006). Yet most of the contemporary philosophical writings are far from being antagonistic to business. For example, based on the Qur’an, which says in Q. 59:7, “so that this (wealth) may not circulate solely among the rich from among you,” the prominent Islamic philosopher Hamidullah discusses the economic policy of Islam with respect to distribution. In his writing, he says: “Equality of all men in wealth and comfort – even if it is ideal – does not promise to be of unmixed good to humanity.”

The logic of Hamidullah lies, first, with natural talents not being equal among all men, and, further, in the interests of human society: it is desirable that there should be grades in wealth, which gives the poorer the desire and incentive to work harder. On the other hand, Hamidullah goes on to point out that

Buddhism, in seeking enlightenment through the path to the end of suffering, identifies wisdom, morality and meditation as the three main divisions of this path. Within morality, one of the major goals or themes is right conduct, “which instructs that a good life should be one of selflessness and charity” (Smith and Novak 2003, pp. 38–39). In the words of the Dalai Lama, spiritual leader for the Gelukpa lineage of Tibetan Buddhism: “The realization that we are all basically the same human beings, who seek happiness and try to avoid suffering, is very helpful in developing a sense of brotherhood and sisterhood – a warm feeling of love and compassion for others” (Dalai Lama XIV and Piburn 1990, p. 16).

Hinduism is similar to Buddhism in its goal of liberation from suffering through a path to an end of reincarnation, and Hindu writings on responsibility and service to others define duties (dharma) for a person based on his or her station in life. An ancient text on dharma lists eight virtues: “compassion to all creatures, patience, lack of envy, purification, tranquility, having an auspicious disposition, generosity, and lack of greed” as well as “remembering a good deed and returning it with another” (Coward, Neufeldt, and Neumaier 2007, pp. 92–93). But there is another feature in Hinduism, which is the caste system.

The caste system has had a narrowing effect on dharma and has strongly influenced Hindu ethics. For centuries, responsibility and service to others was not meant to be applied to the lower castes. The Indian Constitution now prohibits discrimination based on caste, and the “untouchable” class has been abolished. Modern Hindu thought is increasingly focused on compassion and kindness across castes, not only within castes (Sharma 2005). This thought is supported in the sphere of economics by what the prominent spiritual leader of the Hindu faith, Prabhat Ranjan Sarkar (Shrii Shrii Anandamurti), called “Progressive Utilization Theory,” a socio-economic framework that seeks the all-around welfare and happiness of everyone, with a clear expression of an equitable economy based on social contract and achieved through a progressive utilization momentum that strives to meet the basic necessities of all and to progressively improve the standard of living (Anandamurti 1994).

This brief enumeration reveals striking similarities between religions. So, it is quite logical that an effort has been made to draw up a minimal code of rules of behavior that all religions can accept. This was achieved in the project Weltethos (“Global Ethic”), initiated by the Swiss theologian Hans Küng (www.weltethos.org) and his Declaration of a Global Ethic (www.religioustolerance.org/parliame.htm). There are two streams of criticism of this project that was initiated in the early 1990s: one is from the churches that fear that centuries-old knowledge and traditions might fall into oblivion if there is just one common denominator; the other is that the project marginalizes people who are not religious. A “counter-project” that was established on this behalf is Ethify Yourself (http://ethify.org/en), a community promoting an ethical lifestyle and good working conditions based on principles such as prudence, balance, fairness, self-determination and justice. This brings us back to the question of how spirituality that is not based on a religion can define moral and ethical guidance. A good way to look at this in the context of business ethics is by viewing how this spirituality translates into workplace practice.

When organizations open up for a spiritual dimension, they make room for meaning, purpose and a sense of community. This would embody employees’ search for simplicity, meaning, self-expression and interconnectedness to something higher (Marques, Dhiman, and King 2007). A growing number of organizations, including large corporations such as Intel, Coca-Cola, Boeing and Sears, were reported to have incorporated spirituality in their workplaces, strategies or cultures (Burack 1999). This may also extend beyond the borders of the firm. Some corporations incorporate spirituality into their strategies within the framework of corporate social responsibility. For example, the late Anita Roddick, founder of the Body Shop, was committed to contributing to the needy in the area of Glasgow, Scotland, through social responsibility projects. The projects were destined to solving the problems of high unemployment, crime rates and urban decay in the region. She invested a quarter of net profits back to the community to “keep the soul of the company alive” (Karakas 2010).

Howard argued in 2002 that the “explosion of interest in spirituality as a new dimension of management … [was] probably the most significant trend in management since the 1950s” (Howard 2002, p. 230), but since then many other mindsets have arisen that embrace ethics, entrepreneurship, systems thinking, self-awareness and spirituality within the dimensions of management (Gretzel et al. 2014; Hörisch 2014). From green spirituality, which considers nature as having intrinsic value, deserving reverent care and sacred (Taylor, R. B. 2010), to mindfulness, which is linked to compassion and a sense of responsibility to others (Hamilton, Coulter, and Coulter 2015, p. 304), leaders can choose from a broad range of non-religious concepts for determining how to act morally and make their followers act morally. Non-religious is equal to having a secular worldview – that of the ancient philosophers, of the Renaissance humanists or the 19th- and 20th-century existentialists. Whichever belief it is, it belongs to public life, and what secularism does not mean is that the motivation for one’s doings is his or her private matter: what counts is conscience, and it is conscience that “unites thinking persons and free peoples across ethnic, national and creedal lines” (Dacey 2008, p. 211).

Given this broad range of ethical concepts, why do people, and leaders in particular, still act immorally? Social psychologists demonstrate that the evolution of humans has always encompassed both cooperation (more successful hunts in the Stone Age, group protection from enemies, etc.) and rivalry (more resources for oneself and family, etc.), and that the direction taken in any given situation will depend on a complex array of variables (Tavris and Offir 1995, pp. 332 ff.).

The variable that is said to have the strongest influence is power. What is often referred to is the famous assertion of Lord Acton in 1887 that power tends to corrupt and absolute power corrupts absolutely (even though this assertion was originally directed towards suggesting that democratization reduces corruption; see Werlin 2007). The more general notion may also apply to corruptive structures in the business world such as influence markets, elite cartels, oligarchs, clans and moguls. The means and mechanisms to fight and eliminate abuse of power. Some of the positive evolvements regarding power will be studied in Chapter 6, which encompasses implementation of human centered management.

To end this section on societal and individual rationales, one last issue needs to be explored, and this is about why immorality happens at all.

Why are we immoral? Or, in the business environment, why do corporations act irresponsibly, such as cheating customers, violating human rights or damaging the environment? Or why do we often find people in the boardrooms who are destructive to their organizations, their employees, their countries and their constituents? These “toxic leaders” often “slip into paranoia and toxicity, frequently devote the lion’s share of their energies to controlling their followers … instead of pursuing growth” (Lipman-Blumen 2006, p. 16). The answer, apart from the socio-psychological perspective mentioned earlier, lies with character. If we just reverse the components of what has been viewed to be the essential components of a good character since the times of Aristotle, we get cowardice instead of courage, recklessness instead of temperance, unfairness instead of justice, and unruliness instead of prudence. While seemingly these are opposites, it is a short step from acting out of self-interest to taking advantage of the vulnerability of others, from working for creating wealth to greed and the satisfaction of acquisitiveness, and from extolling the virtues of individualism to an uninhibited pursuit of gain or glory (Pellegrino 1989).

One might argue that selfishness leads to immoral behavior. But is it just about selfishness? Or should we rather ask about the standards of discriminating between good and evil? Most people shrug their shoulders hopelessly if asked, “What is unfair?” But there is an easy answer. Unfairness can be defined as violating the rules by which we have agreed to be bound in social relationships. And this is where the individual and the societal rationales concur: these rules need to be based on values that apply both to an individual and to a collective group. For the eminent American economist Paul Heyne (1931–2000), who posed the famous question “Are Economists Basically Immoral?” (Heyne 2008), these values are order, minimization of conflict, reasonable equity and the preservation of physical life. Disorder, maximum conflict and inequity are therefore the outcomes of immoral behavior. That applies to corporate life as well.

There are many answers to the question of why corporations act irresponsibly. One answer that is often given is that some people might have different moral beliefs and values at work from those they have at home – people have “multiple ethical selves” (Treviño and Nelson 2011, p. 149). We might also look at the influence of bureaucratic organizations on the value system of individuals, as was first done by Max Weber in the 1930s when he distinguished between actions that were guided by an ethics of ultimate ends (a translation of the German word Gesinnungsethik, which, however, narrows Weber’s term) and an ethics of responsibility (Verantwortungsethik).

Weber had a positive view of organizational rigor (like in a bureaucracy), and although much can be said of bureaucracy’s negative features, its effect on social order is recognized even in today’s world of super-organizations. A contemporary argument, for example, is by Paul du Gay, who makes a compelling case for the continuing importance of bureaucracy and for the relevance of bureaucratic ethos (Du Gay 2000). This leads to another answer, which lies with the construct of corporate (social) responsibility.⁶ The term has been used in many different contexts, but the underlying view stems from a negative discernment: since quite a few corporate activities do not comply with the normative beliefs of society, firms need to be criticized for low social and ecological standards, for price increases, or for the dismissal of employees. But it must be questioned if such activities can be declared per se as irresponsible (Jones, Bowd, and Tench 2009). The point is that there is a sliding scale from strong certainty to strong doubt about the factual validity of one particular corporate action being harmful to the parties affected by the action.

The proper avenue to access the question of what is irresponsible would be what has been called provisional ethics by the French philosophers Michel de Montaigne (1533–1592) and René Descartes (1596–1650). They made a distinction between knowledge and conduct. Both were theologians, and they attributed the power of full knowledge only to God, while acknowledging that humans do not possess sufficient intelligence to comprehend “how he leaves the free actions of men indeterminate” (Shermer 2004, p. 108).

Provisional ethics would offer a conditional (“provisional”) agreement on what is right or wrong with a corporate action if the evidence and justification for the action allows clear judgment. The judgment remains provisional because the evidence and justification might change. Again, we have here a nexus between the individual (a corporate leader) and the societal (the normative beliefs): irresponsible action occurs when a corporate leader disregards, bends and neglects the beliefs of his or her constituency.

There is other reasoning on the defects of corporate legitimacy, which originates from the views of legal theorists: constitutional lawyer Joel Bakan (2004) has argued that the law constitutes the corporation as a dangerous psychopath, because, as he contends, it exclusively focuses on profits. Bakan, a Canadian law professor, became famous for the movie The Corporation, which he directed and which features evidence from critics of corporate behavior such as Noam Chomsky and Michael Moore presenting brutally dishonest investment brokers, corporation spies and other negative examples of corporate “psychopaths.”

The term corporate psychopaths is used to describe “managers with no conscience who are willing to lie and are able to present a charming façade in order to gain managerial promotion via a ruthlessly opportunistic and manipulative approach to career advancement” (Boddy 2005, p. 30). Bakan’s argument is that corporations benefit hugely from the legal fiction that they are persons, hence entitled to the legal rights of persons, even though their only duty is to follow the law (Achbar and Bakan 2003).

Bakan followed in the footsteps of Lawrence Mitchell (2001), a corporate law scholar, who compared the corporation to a “golem” that can never be called back (Mitchell 2001). By using the word golem, which stems from early Judaism and characterizes an animated anthropomorphic being that was magically created from inanimate matter, Mitchell wished to point out that man has created a monster eluding its own creator. In Mitchell’s view, in order to avoid a firm becoming a golem, corporate law must give shareholders the exclusive right to elect or remove directors, the exclusive standing to initiate lawsuits on behalf of a corporation against any third party, and the exclusive ability to sell control of the corporation to the highest bidder. Interestingly, Mitchell comes up with the idea that managers are, at heart, “decent people; and, if left alone, they will use their powers responsibly” (Mitchell 2001, p. 13), and the problem of irresponsibility would thus have to be resolved by limiting shareholders’ voting rights. Mitchell pleads for public-spirited deliberation within the corporation, and indeed there have been many positive evolvements in this direction since his critical writings, with US corporate governance structures moving slowly towards characteristics that include a higher degree of outside control (Cremers and Ferrell 2014). Nevertheless, this still leaves us with the issue that if it is not the managers, then it could be the stockholders who may stay out of control when acting irresponsibly.

At the end of this section we seem to have reached a conundrum: can neither the appeal to the individual nor the societal appeal prevent leaders from wrongdoing? And does the legal foundation for corporate behavior promote irresponsibility towards all other stakeholders over the profit for shareholder maximization directive? If so, could an economic appeal furnish a remedy? Is there a mechanism in the business environment that provides a means to automatically eliminate immoral behavior, i.e., to make managers and corporations both “do good” and “avoid bad”? It seems there is, because otherwise the managers at Enron and Siemens who cheated and bribed, and Bernie Madoff, who literally dispossessed investors, to name just three cases, would not have been taken to justice. And we can also find some philosophical argument for this, as will be shown in the following section.

2.2.3 Grounding moral theory in economic thought

When asking if there are market mechanisms that prevent or at least eliminate immoral behavior, the first theory that comes to mind is the moral market. The moral market construct (established by Boatright in 1999; see also Smith 2005; Dunfee 1999) leads away from the focus on the individual responsibility of managers towards a focus on the economic regulations that achieve ethical ends. We are not looking at formal regulations by laws and ordinances that minimize managerial discretion but rather at (informal) mechanisms that punish immoral behavior. With this, we proceed from the axiom that markets and competition ought to serve human beings, and this is moral, as it does good.

Competition and the market economy alone can guarantee and enhance the opportunities of all individuals for a better way of life. So business ethics in the market economy become, paradigmatically, the ethics of the social order (Homann 2006a). The question is not whether altruism or other non- advantage-seeking behaviors are anachronisms in a competitive environment, nor whether practice has proven that only self-interested behavior leads to beneficial economic result. The question is whether this incentive- and advantage-based ethics (Lütge 2005) provides both a theoretical and a practical framework that will encompass rules that ensure moral behavior. In practice, private business firms have increasingly taken on the role of corporate citizens by embracing the rights and duties of lawmakers and political actors. They have engaged in rule-finding discourses and rule-setting processes in which they actively cooperate with government and civil society organizations (Bardy, Drew, and Kennedy 2012).

The link between the economic and the ethical paradigm is advantage- seeking: if economics, in the general sense, is an “advantage/disadvantage grammar where advantages and disadvantages steer action and expectations” (Homann 2006a, p. 7), this holds true for ethics as well. Ethics and economics both explain and shape the results of interactions – more specifically, the aggregate results of interactions. Ethically significant results can never be introduced by an individual agent on his or her own; they are determined by the “rules,” that is, the mechanisms governing the business and social environment, and by the incentives issuing from them. Thus, if moral behavior promises to be recompensed – in whatever fashion – individuals behave morally from self-interest (Homann 2006b). Business ethics, thus, is an ethics of conditions, of orders or of incentives.

This may turn out differently in crisis situations: Etzioni (1998) argues that when businesses with a moral culture run into difficulties, the deontological motive is more important than the economic motive. In times of economic hardship especially, this motive may prove more significant than the profit motive in the continued pursuit of corporate policies.

Emphasizing the importance of a carefully crafted balance between rights and responsibilities and between autonomy and order, Etzioni has provided broad empirical evidence that demonstrates that business leaders, to a large extent, feel they have a moral duty towards society. Subsequent empirical research has verified Etzioni’s view that they are driven more by intrinsic motivation – a person’s will to obey a certain moral norm because it is desirable in itself – rather than by extrinsic motivation – the will to adhere to a moral norm because it is instrumental in achieving another end, such as earning money (Graafland 2002).

We may also see Etzioni’s thought as a symbiosis between utilitarianism and Kant’s categorical imperative: subjugating utility to morality, that is, pursuing an advantage only if the means are moral would create a moral organization. And it would be in line with the argument that self-interest and the profit motive need not necessarily be in conflict with moral claims of conscience – an argument that goes back to Adam Smith’s unique projection of moral philosophy (his Theory of Moral Sentiments) onto his economic writings (the Wealth of Nations).

In “updating Adam Smith on business ethics” (Wagner-Tsukamoto 2012; Stroud 2002), contemporary scholars point to three different perceptions of Smith’s concept, in terms of (1) societal welfare (public good) as an outcome of economic activity, (2) the systemic codification of morality in institutional frameworks (e.g., business laws), and (3) the embedding of ethical reasoning in market transactions. What we have here concurs with the four perspectives that this book claims to be inherent in human centered management. So even though structures of society have changed since the era of Adam Smith, ethical concepts and categories have obviously not changed to a large extent.

There is, however, one aspect that has changed since the times of Adam Smith: while he recognized that ethics must govern both the competitive actions and the rules (the conditions) of competition, his view on the criteria that determine the rules of the game was necessarily limited to the common values of his society. Today, in the age of globalization, there is no a priori consensus on common values. This does not negate the need to achieve this consensus for a business entity⁷ or for a business transaction, but on a global level the only “value” that secures stability is reduced to that of mutual advantages and benefits. This has been called sociological economics in the work of 1992 Nobel laureate Gary S. Becker (MacRae and Becker 1978).

Advantages, according to Becker, are simply monetary, financial or material advantages; they are everything that people consider beneficial (health, reputation, the good life, etc.). Monetary incentives themselves can sometimes crowd out intrinsic motivations for moral behavior. But advantages and incentives, if they are part of clearly defined rules, can govern moral behavior; therefore, the challenge for rule-makers is to establish rules that provide these types of advantages to all. Here we are looking at the institutional perspective again: the system will only work if there are institutions that ensure all parties to a market look for their advantage, that set the right incentives for dealing with the quest for advantages, and that are able to implement sanctions for enforcing incentive-compatible rules. The institution that best serves to guarantee all these assurances is the capitalist system of free markets.

The issue, then, is to engrain morality in capitalist society, or the other way round, to prove that morality is engrained in capitalist society because no other economic system can provide advantages to all members of the society.

2.2.4 Engraining morality in capitalist society

Capitalism is a social setting in which businesses can operate freely. The first view on morality in capitalist society must be one that defines freedom or liberties philosophically. The basic understanding is that a free society provides “unalienable rights” (a term that is used in the US Constitution) to all its members, and that these rights are, according to the definition of the English theorist and political practitioner John Locke (1632–1704), “life, liberty and property” (Locke, J. 1698/1988, § 131). While the US Constitution’s “unalienable rights” are spelled out as “life, liberty and the pursuit of happiness,” Locke’s emphasis on “property” (for which the state, as he says, must give protection from its whole strength) implies the right of the society’s members to use it, give it away or sell it. Property rights, thus, may deemed to be moral rights. And while property per se is no guarantee of happiness, happiness is, for at least most of humanity, unattainable without some property.

Locke took property rights to be essential for a well-functioning society (a “just” society). His view has influenced the establishment of legal frameworks on property in the Western world and, nowadays, beyond; and while he asserted that the state must give protection, he excluded government control on property or general restrictions to its use. With property rights being the basic support of the free society, the question then arises, how far do these rights go for the owners of property, or of businesses? The logical limit is the rights of others. This would be the principal rule of the game. So quite logically, from this end, but at the same time quite disputably, Milton Friedman’s (1970) famous conclusion comes up with “There is one and only one social responsibility of business … to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” – a quotation from which the moral appeal placed in the second half of the sentence is often left out.

The Friedman doctrine is controversial, especially in hindsight and in view of the abuses of corporate power that happened in the many decades after Friedman’s proclamation. But Friedman’s view also holds that managers spending resources on social issues misuse their position as agents of the business owners. So since ownership rights need to be respected, this offers a way out of Friedman’s dilemma: if business owners decide to assume social responsibility, they are justly exercising their role in society. Friedman’s theory will be examined briefly in section 3.1.

Another fierce advocate of the free capitalist market, though less well known in the US and many other countries, was Ayn Rand (1905–1982). Her thoughts, however, are of a higher quality than Friedman’s simplistic stance, as they are rooted in a philosophical concept. They deserve to be recalled here, because her philosophy, which she coined objectivism, considers laissez-faire, that is, unrestricted, capitalism as the only moral social system because only capitalism is based on the protection of individual rights and property rights (Peikoff 1991). She opposed statism, which she understood to include theocracy, absolute monarchy, Nazism, fascism, communism, democratic socialism and dictatorship. Ayn Rand knew what she was talking about, because before moving to the US in 1926 she lived in Russia and experienced the revolution and the brutal system that the communists erected.

The term objectivism is intended to express that the only means of knowledge is reason (as opposed to any “higher” ideology) and that rational self-interest is the objective moral code (as opposed to utilitarianism); thus, logically, unrestricted capitalism becomes the only objective social system. But one must not simplify. Ownership rights are but one element of capitalism with moral implications; there are also competition, command and change. We have here another systemic phenomenon: competition, defined for this context as the effort of securing a business by offering the most favorable terms, and command, viewed as the execution of power related to ownership rights, affect the changes that occur in a society. Clearly, command and competition are also interrelated. The opposite view on this is to fear that laissez-faire capitalism creates market imperialism.

Market imperialism would mean that money could buy anything, and a laissez- faire economy would invade every sphere of life, transforming every good into a commodity: it would “purchase state offices, corrupt the courts, exercise political power” (Walzer 1983, p. 120). And, indeed, in some post-Soviet countries market imperialism took on these manifest forms, displaying an extreme manner of pure profit seeking, which eventually has destabilized the markets. This only happened because of a total failure of comprehending what the role of the state ought to be. Going back to John Locke, the clear understanding must be that “free exchange must be protected by the state from its whole strength” (Locke 1698/1988 § 135). The state will guarantee this by providing proper institutions, rules, customs and traditions to the extent that the free market requires these guarantees to be able to sustain itself.

If the state provides well-functioning public institutions, this also guarantees freedom from economic oppression and ensures fair dealing in all market transactions. While we have to admit that this idealistic condition is not omnipresent, as markets spin out of control and unfairness is practiced deplorably often, we also see that remedies, both short and long term, are provided by institutions: the legal system, state supervision of, for example, the financial service industry, self-regulatory bodies of business associations and so forth. It is the moral framework provided by these institutions that prevents market capitalism and makes the capitalist system appealing to all members of society because it is beneficial to each and every one – it is moral capitalism. Again, is this just another idealistic condition? There is an answer to this question: moral capitalism works.

“Moral capitalism at work” (the title of an essay by Stephen B. Young, co-founder of the Caux Round Table;⁸ see Young 2006) can be observed throughout the world in a myriad of cases that exhibit exemplary corporate behavior. They range from Unilever’s and Chevron’s partnerships with society that were mentioned earlier, to the initiatives of Grameen and Danone Foods providing affordable nutrition for malnourished children in Bangladesh, and of Microsoft and Google enhancing knowledge in developing countries (see, e.g., Prahalad 2010; Allison 2015; Peterson 2015). The model applied by Google is called “for-profit philanthropy,” embodied by Google.org, a boundary-spanning entity managing an annual philanthropic budget of USD 2 billion (Kelly 2009).

We are witnessing the opening up of China and India, which has lifted hundreds of millions of their people out of poverty through the increasing employment opportunities afforded by these countries becoming the new manufacturers and service providers of the world. It is through this process that capitalism is shaping their living conditions and that capitalism is being shaped to the advantage of a previously underserved population. Because there still remain regions in Africa, Asia and Latin America that are economically underdeveloped, it is up to the major economies and the multinational firms to set the stage there for transformation and restructuring. With the power of the large firms involved, we often find that if the national institutions in a given country do not provide the optimal setting for moral business, corporations often perform a mediation function. Positive outcomes in this field will sooner or later stifle the anti-globalization movement, as evidence of a better way will eventually persuade most of the critics in the long run.

The essence of what has been called moral capitalism is about reconciling private interest with the public good). In line with this, Andrew Young, former US ambassador to the United Nations, coined the term public purpose capitalism (Sehgal 2010) to denote socially active public–private partnerships where the private sector would invest in public facilities, buildings and businesses. The concept had a tremendous success in Atlanta, where Andrew Young was the mayor from 1981 to 1989, and it was then transferred to Africa where the Southern Africa Enterprise Development Fund was founded in order to enhance social and infrastructure projects. The most recent application of the concept is in Haiti, where a similar Enterprise Development Fund is being built, which it is hoped will produce a sustainable economy after the earthquake disaster, and not just a relief economy aided through grants from abroad (Young 2010).

Serving society with a greater purpose (i.e., committed to making a difference in the world) and producing a reasonable profit certainly poses a challenge to business managers. Whether it is termed sense-making business or integral business, the drive to create organizations and careers that are both purposeful and profitable has not only become a “trend” (Whetten 2013); it seems that this is the only one option: managers and stockholders alike will only draw long-term wealth from their activities and from their holdings if their firms neither sacrifice social and environmental purposes for profits nor sacrifice profits for social and environmental purposes either. There are many examples of carefully crafted business models to achieve this (see, e.g., Osterwalder and Pigneur 2011). And firms that view society and their workers as the ultimate stakeholders are nevertheless highly profitable. Sisodia et al. (2014) call them “Firms of Endearment,” and it has been shown that their share value has increased about ten times more than that of the S&P 500 companies over the 15-year period ending in 2014. Chapter 8 of this book will show more data on the issue.

The importance and the promulgation of the topic can be gleaned from several other denominations beyond “moral” and “public purpose”: conscious capitalism, from Rajendra S. Sisodia (2011); shared value capitalism, from Michael Porter and Mark Kramer (2011); creative capitalism, from Bill Gates (2008); and capitalism 3.0, from Otto Scharmer (2010). There may be slight differences in where the concepts place their emphasis, but the focus and the objectives are all the same: assuring that financial wealth is not created at the expense of social, cultural, environmental, intellectual, physical and spiritual well-being; empowering people at all levels; and engaging their best contribution to serve a higher sense of purpose and thus making a net positive impact on the world. The main argument is that, because corporations take resources from society, they have a moral obligation to give back, although a few dissenters believe that if organizations voluntarily contribute to social causes they are misappropriating shareholder funds.

Two other terms should be looked at briefly in this context. The first, welfare capitalism, has been around for some time, while the second, sustainable capitalism, is relatively new.

The term welfare capitalism is used for two issues: one relates to a society that has a capitalist structure and where the government applies a wide range of welfare policies, for examples, in the countries of Scandinavia; the second meaning is the practice of businesses providing welfare services to their employees. Welfare capitalism in this second sense, or industrial paternalism, was practiced in industries that employed skilled labor and peaked in the mid-19th century. One protagonist was Robert Owen, who introduced one of the first private systems of philanthropic welfare for his workers in the cotton mills of New Lanark in Scotland and then transferred this scheme to New Harmony, Indiana, where he created a model cooperative.

In the early years of the 20th century, the Cadbury family of philanthropists and business entrepreneurs set up a similar model in their chocolate-making factory at Bournville, England, where loyal and hard-working employees were treated with great respect and given relatively high wages and good working conditions; Cadbury, even though nowadays often criticized for turning a blind eye on child labor (Mena et al. 2016), has pioneered pension schemes, joint works committees and a full staff medical service. Also in England, Lever Brothers (whose name is remembered in Unilever) built Port Sunlight in Wirral to accommodate workers in their soap factory. The model village could house a population of 3,500 and it had a cottage hospital, schools, a concert hall, an open-air swimming pool, a church and a temperance hotel. Lever Brothers introduced welfare schemes and provided for the education and entertainment of the workforce, encouraging recreation and organizations that promoted art, literature, science or music (see https://en.wikipedia.org/wiki/Welfare_capitalism).

The denomination sustainable capitalism was first used by Al Gore and David Blood to describe a “framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision- making process” (Gore and Blood 2012, p. 66). They suggest various key actions, including:

• Identifying and incorporating risk from assets that are not valued properly (“stranded assets”), for example, by attributing a reasonable price to carbon dioxide emissions or water. As long as this is ignored, stranded assets can cause reductions in the long-term value of particular companies and entire industry sectors.
• Integrated reporting by corporations on both their financial and ESG performance.⁹
• Aligning compensation structures with long-term sustainable performance in order to hold asset managers and corporate executives accountable for the ramifications of their decisions over the long term.

Those concepts may have a very optimistic feel, but the people who devised and employed them do not live in an ivory tower; they were and are close to business. They know that strong institutions are needed that deploy a proper balance between regulation and the freedom of corporations to decide on their own behalf; they know that institutional arrangements that are characteristic of certain welfare state regimes might well have unintended negative consequences; they know that excessive governmental restrictions on property rights, fiscal freedom and monetary freedom will impact entrepreneurial activity; and they know that exceptional leadership is needed to implement moral capitalism at state, industry and corporation levels.

Most leaders acknowledge that improved external controls are important in today’s business environment, and they pursue strict compliance with regulation as this helps to bring “one’s ethical house into order … and to reconcile ethical mandates and the individuals’ personal wishes or values” (Schminke, Arnaud, and Kuenzi 2007, p. 173). But there are other enablers for human centered management as well.

2.3 Enablers of human centered management

People do not come into this world as born leaders, let alone as moral leaders. They have to learn about ethics and morality through proper education and mentorship and from personal experience. In this process, they will pass through three levels of moral development (see Kohlberg 1981): the pre-conventional level that anchors moral principles in narrow self-interest, fear of punishment and desire for reward; conventional morality, representing an emerging concept of self-identity in the framework of institutional community where morality is motivated by concepts such as being a good neighbor, community member or citizen and devotion to community norms and authority; and post- conventional or principled morality, which utilizes universal moral principles transcending community norms and is rooted in a conception of autonomy and moral objectivity (Gross 1995). Attaining this objectivity will enable a leader to stay firm in ethical decision-making.

Staying firm in ethical decision-making is often hampered by various stumbling blocks. One is the argument that the notion of ethics is by no means global, that it evolves according to time and culture, and that each individual, at a given place and at a given time, has a unique degree of ethics. Sociologists call this situation-specific (Annas 2006), and the main proponents of the situationist thesis (e.g., Doris 2002) base their views on psychology experiments such as the famous Stanford prison experiment of Zimbardo in 1971. This experiment will be briefly discussed here because it is deemed to be the most powerful example of how work roles can have substantial impacts on how we behave. There are prominent textbooks on business ethics (Crane and Matten 2004, pp. 134–136; Brenkert and Beauchamp 2010, pp. 44 ff.; Sekerka 2016, pp. 122 ff.) that argue that the experiment exhibits the stifling effect of a role assignment on individual morality.

The Stanford prison experiment was conducted in 1971 under the supervision of the Stanford University psychologist Philip G. Zimbardo, who assigned the roles of “prisoner” or “prison guard” to 24 healthy middle-class male students within an experimentally devised mock prison setting on the Stanford University campus. The projected two-week study had to be prematurely terminated when it became apparent that many of the “prisoners” were in serious distress and many of the “guards” were behaving in ways that brutalized and degraded their fellow subjects. In addition, the role-playing situation was beginning to influence virtually all those who operated within it to behave in ways appropriate to the characteristics of the prison setting, but inappropriate to their usual life roles and values; this included the research staff, faculty observers, a priest, a lawyer, ex-convicts, and relatives and friends of the subjects who visited the prison on several occasions (Zimbardo 1973).

Most workplace situations are quite different from the prison environment, but we do find situations in the business world where good people can be readily induced into doing evil to other good people within the context of socially approved roles, rules and norms, and even with institutional support. We also find situations where blind obedience to an authority may suffocate the values, beliefs and attitudes a follower normally holds and where a leader utilizes this purposefully.

Human centered management must be strong enough to withstand conditions close to those described previously, and this psychic and cognitive strength will have to be built on knowledge about the problem positions that relate to this context. There may be five problem positions that can lead to suppressing one’s own morality: obedience to authority, mood effects that can be characterized as having been brewed by organizational culture, conformity with a group that prevents moral behavior, the hurry factor inhibiting people from stopping and being a Good Samaritan when that would be the right thing to do, and lastly, deception, when bending the truth seems to be more appropriate than telling the truth (April et al. 2010).

Awareness of these issues will not only enable a leader to challenge their outcomes; it will also generally lead to an increased perception of uncertainty and risk in business matters that involve moral decision-making. The moral perspective is but one matter in decision-making; it is, however, the one with the widest impact. When depicting what makes a great business leader, one all-embracing attribute was emphasized early on by Emory professor Jeffrey Rosensweig: being able to link people and profits. Rosensweig (1998, p. 203) goes on to list the following competencies of a truly global manager: broad education, multicultural sensitivity, integrity, embracing moral values, responsiveness, energy, interpersonal skills, command of information technology and fluency in several key languages.

Leaders who apply the capabilities identified by Rosensweig within a global system of free trade and coordinated international policies will set the path for “bringing hope – and not only hope but actual economic progress – to the billion or so truly indigent people on this planet. Business is, bar none, the best real hope of the poor” (Rosensweig 1998, p. 234, quoting from Michael Novak’s 1996 book, whose title, Business as a Calling, truly indicates how corporate leaders should apprehend the human centered paradigm).

2.3.1 Enablers from within: Amartya Sen’s capabilities approach to personal and social development

The capabilities approach was popularized by Amartya Sen (1985, 2000). Capabilities, according to Sen, are the alternative combinations of functionings an individual can achieve. For Sen, functionings denote the various attainments a person may value – varying from elementary issues such as nourishment and shelter to complex ones such as self-esteem and community participation (Sen 2000). The focus is not on collective outcomes such as, for example, justice, but rather on building individual competencies, and ensuring that people have the freedom to convert economic opportunities into outcomes they desire.

The capabilities approach is a normative proposition: what people can do and be – their capability-set – depends on the one hand on their resources and on the other hand on factors that affect their ability to use resources to achieve doing and being. The emphasis is on the extent of freedom people have to promote or achieve functioning they value. Progress, or development, or beneficial outcomes of human centered management occur when individuals have greater freedoms. With regard to moral capitalism, a primary evaluative role of the capabilities approach is to assess if this system has expanded human freedom, or what kinds of freedoms the system has expanded. In the context of human centered management, capabilities are the enablers from within the individual for deploying his or her resources. But there also is the systemic relationship to institutional, social and economic structures, because these (like the structures of a capitalist society) would expand an individual’s capabilities.

2.3.2 Executing the philosophical agenda

The philosophical agenda of the moral perspective, as laid out previously, turns into action through leadership capabilities. They are the foremost enablers for discerning what is right or wrong, for defining the practices and rules, written and unwritten, that describe responsible conduct and behavior, for arriving at moral decisions and for enhancing the common good. One might think that when doing the right thing it does not matter how or why it was done, whether willingly or unwillingly, through fear of public opinion or for its own sake. But, in the words of the British essayist C. S. Lewis (1952, p. 74), “the truth is that the right actions done for the wrong reason do not help to build the internal quality or character … and it is this quality or character that really matters.” It is the right reason – the philosophical agenda – that produces the right consequences. This agenda is fundamental to the very essence of how individuals set (moral) actions and make (moral) decisions. So, it is through the effects that we need to investigate how the agenda works. Two effects will be exhibited in the following sections: The impact of leadership on followers of a leader, and the impact on the business environment of a morally led enterprise. The effects on business performance will be shown in Chapter 4, which analyzes the economic perspective.

One striking comparison will be used here that steers us to the two effects that will be examined. This is the comparison between what guides an irresponsible corporation and a moral corporation (see Table 2.1).

In this comparison, under the heading of “moral corporation” are the standards developed by the Caux Round Table. The Caux Round Table is an international network of principled business leaders – leaders who follow moral principles. It was founded in 1986 at a meeting in Caux, Switzerland, by Frederick Philips, former president of Philips Electronics and Olivier Giscard d’Estaing, brother of former French president Valéry Giscard d’Estaing and founding dean of the INSEAD business school. The Caux Round Table Principles for Business were formally launched in 1994 and presented at the United Nations World Summit on Social Development in 1995.¹⁰ The principles articulate a comprehensive set of ethical norms for business, and they are recognized by many as the most comprehensive statement of responsible business practice ever formulated by business leaders for business leaders.

Source: Adapted from Young 2003, pp. 38 and 88

Many infamous effects of irresponsible leadership have been reported in the media – from criminal acts at Enron and Tyco and WorldCom, to name the most notorious cases in the US and which cost shareholders and customers billions of US dollars, to the Siemens bribery scandal and the Volkswagen emissions fraud. By contrast, the millions of honest and upright businesspeople do not make it to the news. Meritoriously, there are some newer business books that depict how firms can produce a positive effect on their constituencies. Three titles speak for all: Connect: How Companies Succeed by Engaging Radically With Society (Browne, Nuttall, and Stadlen 2015); Everybody Matters: The Extraordinary Power of Caring for Your People Like Family (Chapman and Sisodia 2015); and Firms of Endearment: How World Class Companies Profit From Passion and Purpose (Sisodia, Wolfe, and Sheth 2014). It would be redundant to enumerate the cases presented in these publications. In line with the agenda of this book, a more abstract presentation will be given here on the effects caused by leaders who follow principles like those exhibited earlier. “Abstract” does not, however, mean purely theoretical = they relate to experiences any practitioner will have had in his or her business career.

2.4 The effects

2.4.1 Reciprocities in human centered leadership

Leading is intended to affect other people’s attitudes and behaviors. It goes without saying that human centered management is directed towards positive effects which would be an outcome of moral intention. However, we do not always see moral intentions in managers, and, worse, there are cases where supervisors motivate their subordinates to do wrong (the terms supervisors and subordinates are used here on purpose because good leadership/good management and immorality, as this book claims, should be mutually exclusive). The phenomenon of wrongdoing has been studied under the denomination of workplace deviance and organizational deviance. We may find acts directed against the company, such as sabotaging equipment, stealing and wasting resources, and some of it happens when employees experience leader abuse or lack of leadership support. Occurrences like these suggest that employees abused by their managers may retaliate by engaging in behaviors that harm the organization (Thau et al. 2009). This abuse of power may also be viewed as diverting the focus of leadership from the people to what the person in power wants the people to do (Erkutlu and Chafra 2013).

Abuse of power is the classic example of bad people doing bad things that produce negative effects. But negative effects may also be the outcome of good people doing bad things. There is a psychological background to this (see De Cremer and Tenbrunsel 2012; Tenbrunsel and Messick 2004): individuals often do not see the moral components of a decision, not so much because they are morally uneducated, but because they are unaware of the processes that lead them to their opinions and judgments. Ignorance and false beliefs about oneself can create errors in a manager’s judgments concerning moral responsibility and in estimates of the effects a decision can cause. Carefully examining the overall effect of a decision would help to remedy theses errors. But it may be difficult to perform this analysis, above all when a manager works in a large organization where the decision-making process is complex and where organizational units may have conflicting interests. Here, “too many hands” are partaking in the processes and individual responsibilities are prone to get lost. This “Many Hands Dilemma” (Kaptein and Wempe 2002) may also occur when collective responsibilities get lost in joint efforts with external stakeholders. A solution for both the internal and external dilemma would be to portray a clear-cut business model that describes the division of work and the input/output at interfaces. This would allow to chart and to monitor the chain of effects.

Managers who strive for positive effects may just be motivated by their assumptions of duty. They may not be aware that there are two reasonings on duty: positive duty and negative duty. Negative duty is simply the idea that one ought not to cause unnecessary harms to other people. This could include causing physical harm or financial disadvantage or impediments of a career, or even lying and theft. There is the argument that on a view that is bound by negative duties: “we are free to pursue our interests and do as we wish, so long as our activities cause no harm to others” and “if we unnecessarily cause harms, we are responsible for them and owe redress” (Fairley 2006, p. 2 f.). Positive duty, on the other hand, requires that one provides help, even if she or he had nothing to do with the origins of the harm, and ought to improve the situation of those who are badly off (see, e.g., Singer 1972, in his seminal article “Famine, Affluence, and Morality”). Whether managers are aware or not of the difference will hardly determine their day-to-day decisions; and if the effect is positive, the nature of causation is irrelevant. It does count, though, when a decision needs to be justified.¹¹ But, it will be the effects of a decision on which the line of arguments for that justification will have to be based in the first place.

Effects, in the sense of what is to be achieved by a leader’s or a manager’s action, will come in a variety of manifestations – from improving a business process to changing customer or supplier relations. But there is more as we deal with human centered management/leadership with its focus on people. This is intrinsically what has been called transformational. The concept of transformational leadership was introduced by James McGregor Burns. He defined transformational leadership as a process where leaders and their followers raise one another to higher levels of morality and motivation (Burns 1978).

There also is the definition of authentic leadership, which refers to pattern of leader behavior that draws upon and promotes both positive psychological capacities and a positive ethical climate, to foster greater self-awareness, an internalized moral perspective, balanced processing of information and relational transparency on the part of leaders working with followers, fostering positive self-development (Walumbwa et al. 2008, p. 94). Another term, coined by Edwin P. Hollander (2012), is inclusive leadership, which highlights the role of followers as a key to effectiveness. There is a distinct reciprocity in each of these concepts: leaders who are aware of how they think and behave and of the context in which they operate are also perceived by their followers as being aware of the values, moral perspectives, knowledge and strengths of others.

Specific indications of leader–follower reciprocity (leader–member exchange) have been researched by Yukl et al. (2013) in their “Ethical Leadership Questionnaire.” The questionnaire relates to four specific relationship-oriented behaviors (supporting, recognizing, consulting, delegating) and leading by example (which can be viewed as an indicator of integrity), and it asks the respondents to affirm or not a list statements on a Likert scale (see Exhibit 2.1).

The elements of this list indicate that leaders, when they express their true selves by setting examples of morality and by doing good, will not only achieve positive effects on their followers but positive feedback as well. Authenticity, in this respect, goes beyond acting in accord with one’s own values, preferences and needs as opposed to acting merely to please others or to attain rewards or avoid punishments (Kernis 2003, p. 14) towards behavior that incites followers’ personal identification with the leader. This is about building trust – a leader’s capacity to cultivate follower trust will enhance his or her ability to direct followers – and about building social capital. With regard to trust building, it has often been said (see, e.g., Iles and Preece 2006) that interpersonal exchanges between leader and followers have the highest impact on trust as they bolster the followers’ sense of being valued as important contributors. Equally important are contextual leadership behaviors that help followers to make sense of organizational structures, processes and policies (Hernandez, Long, and Sitkin 2014).

Exhibit 2.1 Ethical leadership questionnaire

Source: Yukl et al. (2013), p. 46

The topic of social capital building reaches much further: social capital is a widely discussed theme in today’s economists’ debate after Joseph E. Stiglitz and Amartya Sen took to exploring new indicators of economic performance and social progress beyond gross domestic product (GDP; Stiglitz, Sen, and Fitoussi 2010). They recommend measuring the strength of social connections and relationships to determine well-being in a society, an enormous task that is far from being completed (see, e.g., Dill 2016).

Among the first definitions of social capital were those that pointed towards the inner life of organizations, such as the conception of the American sociologist James S. Coleman (1988) who connected to the research of Oliver Williamson on the conditions under which economic activity is organized in firms or markets. His perception is of “social structures and resources both, internal and external to the organization, which allow us to facilitate responsible action and which are inherent to more or less institutionalized relationships of mutual recognition” (Maak 2007, p. 331). This type of social capital is the one that business leaders can build – they can enable and broker sustainable, mutually beneficial relationships to stakeholders within the corporation and beyond its boundaries. Creating stakeholder goodwill and trust will ultimately build trusted businesses in society.

It is a key quality of responsible leaders to act as weavers and brokers of this social capital. Some writers speak of a straightforward link to a beneficial effect: an “investment in social relations with expected returns in the marketplace” (Lin, Cook, and Burt 2001/2008, p. 4). Whichever concept is followed, mere relations will not suffice. The effort has to encompass content (a common mindset, a cognitive appeal), structure (network configuration and organization) and momentum (seizing opportunity, motivation and ability). One aim is certainly to achieve benefits – advantages and incentives, as said earlier, are drivers of moral efforts. But a responsible leader will also have to take account of the risks inherent in this social capital. They arise because of the complexity of multiple networks and might include inertia and low adaptability of a follower or partner who is overwhelmed by inclusion in the network; but there may also be feelings of exclusion, restrictions on the freedom to act and excessive claims by a stakeholder (Maak 2007).

Social capital building is one of the effects that human centered management of businesses has on the corporate environment. There are many other effects. This will be shown next.

2.4.2 The impact of human centered management on the business environment

Morally led enterprises affect their community directly. There is some empirical research, though not abundant, on the relationship between human centered management in a corporation and the firm’s performance in its business environment. The starting point is connecting the firm’s socially responsible actions towards the customer and supplier base, sustainable product design and so forth with financial performance (e.g., Waddock and Graves 1997; Stanwick and Stanwick 1998; Xueming and Bhattacharya 2006; Nelling and Webb 2009), and the methods that are applied are based on Freeman’s (1984) classic model, which links financial performance to stakeholder relationship and firm strategy, either through a combined effect or through a moderating role of stakeholder engagement (Berman et al. 1999; see Exhibit 2.2).

Berman et al. (1999) tested the model and several variations of it on a sample of 1991–1996 data for 81 of the top 100 firms of the Fortune 500. For this period, they used the KLD (Kinder, Lydenberg, Domini) Socrates Database (www.library.hbs.edu/go/socrates.html), which is a socially screened, capitalization-weighted index of 400 common stocks (the Domini 400 Social SM Index) providing data on those firms’ socially responsive actions.

Five measures were chosen: employee relations, diversity, local communities, natural environment and product safety and quality. The results indicate that employee relations and product safety/quality have the strongest effect on performance – the business environment rewards these attributes the most.

Exhibit 2.2 Strategic stakeholder management models

Source: Berman et al. (1999), p. 493

More recently, Rais and Goedegebuure (2009) made an analysis similar to that of Berman et al. using empirical data for manufacturing firms. For the stakeholder perspective, they adapt a framework developed by Clarkson (1995) that uses a series of indicators for relations with customers, employees, suppliers, shareholders and communities. These were tested in a Likert-type questionnaire, which was answered by a total of 109 companies. The results confirm that managers tend to stay within their fiduciary duties: while they are trained to understand the meaning of responsibility in the context of business processes (finance, human resources, marketing, etc.), they also understand that they are held accountable for the results of their decisions. Therefore, they execute their obligations and responsibilities to customers, employees, suppliers and other important constituencies to the extent that this does not collide with the ultimate goal of producing shareholder value. It may seem that in view of the format in which the questionnaire was designed, the answers did not encompass activities beyond the instrumental ones. This would confirm that stakeholder theory is mainly about managing relations, but still, the moral disciplines of accountability and responsibility are engrained in this model implicitly.

Another type of analysis is reported by Choi and Wang (2009). Their research is based on surveying financial data on 518 firms from the S&P 500 or DSI 400 for the period 1991–2001, with the quality of stakeholder management being computed by scoring ‘strengths’ and ‘weaknesses’ across several areas of relations with groups that don’t directly benefit from the firm’s financial returns – that is, employees, customers, suppliers and the local community. The main findings are that when a firm performs well (above average for its industry), good stakeholder relations help sustain it for a longer period of time, and when a firm performs poorly, good stakeholder relations help it bounce back faster.

Apart from financial performance, reputation is another motivational factor which supposedly drives socially responsible business behavior. Research has been carried out on this (e.g., Graafland, Kaptein, and Mazereeuw 2010); according to this, executives perceive that responsible leadership will contribute to their reputation, especially in the cohorts of older executives who wish to be remembered as good businessmen when their career enters its last phase. But the question remains if there are public relations motives that outshine the intrinsic motive and how can one distinguish between public relation motives and real motives for moral leadership. If this were the case, though, the “cover-up,” similar to “greenwashing” (i.e., just pretending to care for the environment), would certainly be short-lived. In this respect, all firms, and more than others, big firms, face considerable scrutiny from shareholders as well as from other stakeholders. Even a very strong and self-assured CEO cannot afford to jeopardize stakeholder relations.

Maintaining responsible stakeholder relations is not just a part of corporate social responsibility (CSR). It is an ingredient of human centered management. From another viewpoint, stakeholder relations may be seen as part of the firm’s intellectual capital; therefore, research that studies the interaction between intellectual capital and firm performance also encompasses the aspect of (ethically conducted) stakeholder relations. A study that analyzes Australian firms (Clarke, Seng, and Whiting 2010) presents findings that are based on the Value Added Intellectual Coefficient (VAIC). VAIC was developed by Pulic in 1998 (Pulic 1998). Taking a stakeholder perspective, VAIC is offered as a measure of the efficiency with which a firm uses its physical, financial and intellectual capital to enhance stakeholder value. The index consists of the sum of three component ratios: human capital efficiency, structural capital efficiency (which includes both internal and relational capital efficiency) and capital employed efficiency (Nazari and Herremans 2007). In order to calculate VAIC, a firm’s ability to create value added (VA) to all stakeholders must first be calculated. In its simplest form, VA is the difference between output and input. Human capital efficiency is then deemed to be VA divided by the firm’s expenses for employees; structural capital efficiency is calculated as a residual by subtracting those expenses from VA; and capital employed efficiency would be VA divided by capital employed in the firm. There is no business ethics content here, but the approach points the way towards embedding efficiency into the concept of intellectual capital (and, as will be shown in the following, efficiency in a firm and in its relations to stakeholders is indubitably affected by moral behavior).

An earlier study that also used VAIC examined Taiwanese firms (Chen, Cheng and Hwang 2005) and found a weaker effect of intellectual capital on performance than reported in the case of the Australian firms. It may be concluded that firms and investors place greater importance on physical and financial capital than on human and structural capital in East Asian countries. This corresponds with what was said about cultural influence on behavior and ethics in the previous sections.

There are two more results that point in the direction of cultural influence. In the first, a much stronger effect of intellectual capital on performance was found in an analysis performed on the banking sector in Pakistan (Ur Rehman et al. 2012). All banks that participated in the survey had values of human capital efficiency that were higher than those of the other components of intellectual capital performance: 70%–80% of the value creation capabilities are attributed to human capital efficiency, but the interconnectedness with relational capital is demonstrated by the fact that the magnitude of structural capital efficiency follows suit, even before capital employed efficiency. One reason may be that the Islamic work ethic strongly affects employees’ perception of attitudes and behavior and their impact on organizational culture and development of organizational citizenship behavior (Zaman et al., 2012). Not surprisingly, research carried out on the micro-finance industry in Uganda (Kamukama, Ahiauzu, and Ntayi 2010) also corroborates the effect of human capital on stakeholder relationships.

In all, businesses with ethical values at the core will successfully build trust and social capital with their stakeholders. A positive corporate environment is the natural result of an ethical and trustworthy corporate culture. In this reasoning, the interactions and relationships with suppliers, customers and other stakeholders will return positively to the firm, and the firm will be able to attract and retain good talent, which in turn increases human capital. With this, we are arriving at the social perspective of conjoining leadership and morality.