Business ethics, the ultimate competitive advantage

Business ethics is easily one of the most talked about subjects today but poorly defined. It is seen as merely a requirement to discuss in meetings versus being a sustainable competitive advantage that can lower the cost of conducting business. There are virtually no guidelines for business ethics and very little principles that can be practically applied.

Summary: Business ethics is not a criminal issue. They can overlap but are generally mutually exclusive. There are no absolute rules for business ethics and the right decision is determined by the context of each situation. Many ethical decisions are usually selfish when analyzed over the long term. Ethics is a significant career competitive advantage where the benefits can be measured in dollar terms.

What is business ethics?

Business ethics applies to three types of actions:

Actions not covered by the law.

Actions for which the law is not enforced.

Actions for which the law is clearly wrong and should not be enforced.

That’s because in most other types of situations, the law applies and we need not worry about ethics. Therefore, when someone tells me, “, I made this recording because it is legal in my country, so I do not need to disclose to the other person that I am recording them,” what we hear is that the individual is very unethical.

Clearly, the person making the recording would not like to be recorded without permission and knows it is wrong, yet they have gone ahead and done it because it is legal to do so. They are using a legal shield to be unethical.

This logic and the logic that follows applies to both business ethics and general ethics.

Business ethics generally covers actions which are not covered by the law. However, for this recording example above where the law does exist but is not appropriate, leaving the individual no choice but to rely on ethical judgment, the person has demonstrated poor business ethics.

This does not imply that the person making the recording is evil or bad. Wonderful people sometimes do unethical things.

And it is very important not to shame someone for making mistakes nor punish them in perpetuity. Just talk to them and teach them. That is often all that is needed.

If we severely punish people and shame them, they will hide their mistakes and the teaching moment is lost.

Is business ethics a black and white issue?

Many people believe that business ethics is an absolute concept, that you know what is ethical with absolute certainty, you know what is not ethical with the same certainty. It is clear as night and day.

That is not true.

In the West, we have a tendency to think with absolute certainty that our beliefs are ethical and correct.

However, the best way to think about ethics is that it is evolving. What is ethical is often a hypothesis and sometimes there is no right answer.

When judging people for ethical breaches, we have to understand the context. Depending on the person you are analyzing, you have to apply a more severe or less severe definition of ethics. And because you will rarely know the context when reading about a situation, it is best to hold off on a harsh judgment.

Imagine someone who grew up in a challenging part of central Africa, surrounded by warlords. Their social construct they are part of is probably not like that of someone who grew up in Vancouver, the home of Greenpeace. For someone growing up in the strife-torn context in parts of central Africa, we would expect him or her to not be as ethically conscious or self-aware as someone who was raised in Vancouver.

If both people breach the same ethical value, we should look at the situation and also consider what their unique circumstances were, what was normal for them, and whether their actions were abnormal for them.

That is why our legal system allows judges discretion when passing sentencing/judgment. Our legal system recognizes the importance of context. It realizes that the law is not absolute. The law must be interpreted in the context of the situation.

Anyone who tells you that they know with absolute certainty that they are absolutely right is absolutely wrong. You can only be reasonably certain of being absolutely right.

Many times, when we judge people for ethical breaches, we assume context homogeneity. We think that a person who was raised by a loving family in the United States and went to a great school should have the same punishment as someone who was an orphan in rural northern China and hardly had exposure to anything good his entire life.

You cannot measure people this way because their actions are shaped by their social network and their environment. We must compensate for this context.

Now let’s look at some examples of different ways to think about business ethics, and why knowing something is right with absolute certainty cannot work, and why you need to develop the ability to assess these things for yourself.

In many situations, there will be no rules, only principles, and there will never be a guidebook to make this easy. This requires judgment.

Myths about business ethics

Myth #1: It is ethical as long as it is legal.

These are different concepts as mentioned above. When someone says I did not know it is unethical since it is legal in my country, it is clear they misunderstand ethics. Ethical decisions are required when the legal system fails or there are no laws covering action in question, or related laws are wrong. When the legal system is not there, not enforced or wrong you should be guided by your ethical standards.

You can be grossly unethical while obeying the law. You can be extremely ethical while disobeying the law.

Myth #2: If you are ethical, you are by default a nice person and usually a pushover.

Being ethical does not mean you are a pushover. People can be tough and demanding, and yet still be values driven in every possible way. Being ethical does not mean you have to be nice to people. Personality and your value system are completely different concepts.

Myth #3: Following the rule, the softest pillow is a clear conscience is a sure path to ensure high ethical standards.

It only matters if you have a clear conscience if your conscience is attuned to what is actually right. If it is calibrated to things that are incredibly cruel, you will have fundamental problems making judgment calls.

Business ethics or not? Ending one life to save another

Let’s assume you are walking down a street and you see a burning building. You see a baby in that building and you want to save that baby. The only way to save that baby is to jump on the car parked on the street and put some kind of garbage can on a car to reach the window where the baby is. But, to do this, you will need to damage the car.

Would you damage the car to save the baby? Most people would.

Would it change your mind if I told you that the car belonged to someone who needed a very important treatment for a life-threatening illness and they were going to sell the car the next morning to pay for the treatment?

Clearly, that is a tough decision to make.

Do you save the baby now knowing full well that you could kill this person because they won’t get the money for the treatment? A lot of people will choose to save the baby.

Not because they know with any certainty that they can find an alternative means to pay for the treatment without the car—they may not even be committed to looking for additional funds—but because if they don’t save the baby, they appear to be evil or unethical in the present moment.

Many times, when people do things that are ethical, they are not doing it because it is ethical; they are doing it because they are trying to avoid being labeled as evil or unethical.

The flip-side of this is that a lot of actions that we see as being unethical, we see without context. And of course, a lot of seemingly kind decisions are not intended to be kind. They are done to manage one’s image in the present even if the future consequences are dire.

People struggle to compare and contrast the short- and long-term consequences of a decision. They tend to only look at the short-term consequences. Therefore, just because something looks unethical, that does not mean it is. You can only make that judgment call when you know the trade-off.

We need to think about trade-offs. There is always a trade-off. A lot of discussions about business ethics do not consider trade-offs. That is the problem with an absolute view of business ethics.

This is typically a Western view. We assume we know with absolute certainty what is right and wrong. We like lecturing other nations.

We assume that if we decided that x was the “right thing” to do in 20xx, then every other nation that did not come to that same conclusion at the same time as us is evil.

To lecture others is to assume your rate of development in testing and accepting ethical concepts is the norm. Other nations may take longer to get there, but who is to say the speed of arrival is the main issue? Is it not the quality of the implementation when it does arrive that matters? If we fight for the right for children to learn at their own pace, shouldn’t a nation have the same right?

Business ethics or not? Helping a supplier meet their payroll

Let’s look at another example. Let’s assume that you run a company and you have a supplier, TD Furniture, that lost all their other clients and is now totally dependent on you. You want to lower your purchasing price from TD Furniture. You are buying chairs for $200 and you want to lower the price to $150.

TD Furniture proved to you that if they lower the price to $150, they go out of business, but on the other hand, if they do not lower the price, you need to lay off employees to pay for the chairs. Let’s assume you really need these chairs for your business.

What would you do in this situation? Would you say, “I will do the right thing and lay off my people I will not put someone out of business”?

What is a right thing versus the right thing to do?

What if you knew that the reason TD Furniture will go out of business if prices drop to $150 is that they hire mostly family members, overpay them, and deduct numerous personal expenses from the company?

What if you found out TD Furniture charges so much for these chairs because of increasing labor costs incurred after they moved the business to Malibu to be close to the beach?

Should you subsidize their personal desires when you could import the chairs from India at 25 percent of the price?

Should you subsidize this unproductive business and keep them in business when they are clearly not competitive?

If you keep subsidizing them, will they ever be forced to change their cost structure and is it good for them if you enable this unproductive behavior?

What would you do knowing this new information?

There is no right answer. But there is a guide. Do things ethically, provided it does not put you in a situation where you will cause harm to yourself or anyone else. When I say harm, I mean what the average person would consider being sufficiently harmful to justify sacrificing your values, such as putting yourself or your family in physical danger, etc.

Business ethics or not? Allowing the market to set the minimum wage

Now let’s look at an example of an extreme situation of being too ethical, whereby being too ethical could—and we pick that word carefully—be damaging to you and others. Let’s look at the massive, and justifiable, debate taking place in the United States about raising the minimum wage. Let’s further assume we wanted to do the ethical thing—generously raise the minimum wage.

Economics indicates that could be harmful for a number of reasons, including the following:

First, by increasing the money supply, inflation will spike. The price of goods will eventually go up because there is more money in the system. Even though people are getting paid more, things will end up costing them more to buy, thereby, canceling the impact of the salary increase. Therefore, in the medium term, the salary increase will not really matter. The system will adjust itself.

Second, what does it do to the system on which capitalism is built? You should reward people not for how hard they work, not for the skills they bring to the job, but for the supply/demand ratio of the skill they bring to the job. That is, the more in demand a skill is and the less there is the supply of that skill, the greater the salary paid.

If you raised the minimum wage across the United States, you would undertake what is called a populist economic measure. You would do something to make people happy because the social construct to which you belong dictates that it is an ethical thing to do.

Yet, you could be causing some damage to the system because you are giving away money without any commensurate return. Therefore, you can take extreme ethical stances that actually cause more harm than good.

What if the low salaries are being caused by an excess of low-skilled labor driving down prices? Or there is just no demand for some types of work.

What happens if we raise the minimum wage by 30 percent, but income inequality rises?

Is this good or bad?

What if the poverty rate declines, but inequality spikes?

Is this good or bad?

Should we look at lowering the income inequality or lowering the poverty rate?

They are very different concepts requiring different fixes. It is possible to have high-income inequality with fewer people in poverty.

Do you do that which sounds and feels good or what will fix the long-term problem even if it causes pain in the short term?

Business ethics or not? Do the needs of the many truly outweigh the needs of one

Let’s assume you are a mother of two sons. Let’s further assume you are from the middle of a poor emerging economy. There are a lot of kids in your community and your family is very poor.

You’ve got one child who is incredibly promising academically. He is truly brilliant. He aces all the exams. He will probably end as a CEO of some Fortune 500 company. You are almost certain he is going to change the world and take the family out of poverty.

You have another child who is probably not going to end up at any college anywhere in the world. He will likely struggle economically.

Both need a kidney, but only one can get it. Which one will you give it to, assuming you are the only available donor?

This is an extreme ethical situation whereby you know, on the one hand, the child who is probably not going to attend university is not going to have financial resources in the future to take care of himself, so you should probably give the kidney to him.

The one who is going to make it in the world probably will have financial resources, but it is likely he will not make it unless he gets a kidney from you.

If you give the academically weaker child a kidney, the rest of the family will most likely suffer. If you give the academically stronger child a kidney, the entire family will most likely be better off, but the academically weaker child will suffer.

Do the needs of the many outweigh the needs of the few?

Who makes that decision?

There is no right answer. You have to determine what is acceptable.

Business ethics or not? Dying to help a stranger when your family needs you just as much if not more.

Let’s go back to the first example. It’s the same example with some new information. Let’s assume the man who saved the baby is lauded as a hero but tragically perishes in the rescue attempt. Yet, he is remembered for his heroism.

The city builds a statue in his memory, roads are named in his honor, and the main bridge is renamed in his honor. He is feted in the press and the city holds an annual event to honor his memory.

He is a hero. Right?

To whom is he a hero? That is a more important question.

Let’s assume he has a family with a wife and three kids. Let’s further assume both his wife and youngest children are ill. His wife is legally disabled while his youngest child requires expensive treatment. His wife worked very hard from the age of 18 to 26 to pay the bills while he went to medical school.

Thereafter, she became ill and had to retire. As a young couple, their net worth is low, and they are still paying off many bills. They have no disability insurance, etc. At their age, it did not seem necessary.

Are you a hero when you take actions that definitively hurt and probably devastate the only people who helped you, people who need you, and people who would probably suffer immeasurable hardship without you?

One could argue he is not a hero. His actions seem very selfish when viewed from the lens of the family.

On the other hand, you could argue that the baby could not take care of itself, so he is a hero since his wife could take care of herself.

Is the child’s life worth more than the unwritten promises made to his family?

Is he being a hero or selfish?

If he is a hero, to whom is he a hero?

Is that the party to whom he should be a hero?

What is the ethical thing to do in this situation?

Next time you want to be a hero, think of your family. It is not your decision alone to make.

Business ethics or not? Flying off to help foreigners when your own country desperately needs help

How many of you enhance your resume by mentioning your travels to Haiti, Peru, DRC, Kenya, etc., to build homes for the impoverished and destitute?

Why have you not traveled to Detroit, as an example, to help the citizens of that or a similar local city?

Given the lower domestic traveling costs, would you not have more dollars to spend on helping someone versus using up the funds for traveling?

Did you travel internationally for the adventure, since it sounds good and made you feel good?

Where do your obligations lie?

Detroit was once an economic powerhouse in the United States. Taxes paid by Detroit auto manufacturers, their employees, their suppliers, and the service industries supporting all three generated billions of dollars in tax revenue.

Those taxes were sent to the federal government and redistributed across the country, and to foreign aid recipients, to help pay for schools, infrastructure, improved regulation, safety, security, etc. We all benefited from it. You probably drove on a highway this morning partially funded by Detroit taxpayers.

Would it not make more sense to repay the favor by doing charity work for your fellow citizens in Detroit? You were an indirect beneficiary of their largess while a foreign country may not have helped you at all.

Even in circumstances where a region may not have contributed economically in the past, they are fellow citizens, and does it not make more sense to help them?

On the other hand, who will help the people in Haiti? Why not you? There is no law expecting you to distribute your disposable income to only help fellow citizens.

What is the right thing to do?

Let’s take this even further, Why not avoid charity work entirely and just earn a lot of money and pay higher taxes so that the government can do the work that you would otherwise end up volunteering for?

Would that not make a bigger impact?

Are you adding more value in doing charity work than a specialist organization funded with your tax money?

Are cheap Android phones not doing more to spread education and literacy than any charity-driven activity you could undertake?

Would it not make more sense to work at Google 100 percent of the time to help the world versus taking four weeks off to build homes in Southeast Asia?

Would that not have a greater impact in helping people?

There are no right answers.

However, a good rule of thumb, as Joey Tribbiani said, is if it makes you feel good, then it is probably not charitable work.

Business ethics as a career competitive advantage

Management consultants have access to data that moves markets. We advise companies and industry leaders who make multibillion-dollar decisions on investments, new plants, hiring, firing, and more. What we do matters to the world.

Yet, who watches us? We are not a regulated industry.

Senior partners cannot and should not have to check every decision younger consultants make. And who checks the senior partners? Young consultants are given significant autonomy, as are the partners. In the absence of detailed rules, no regulations, etc., how do consultants make the most appropriate decision? Does it even matter if you are not breaking the law or will never get caught, let alone lose your job?

Let’s take it to the extreme case. If you never got caught, why bother? Simply because the benefit of being ethical is a more important reason to be ethical than the fear of any penalty of getting caught.

Business ethics is not about criminal behavior.

This is not a discussion about why being ethical is the right thing to do. What we will show you is that being ethical gives you a formidable competitive advantage to accelerate your career. That should be enough reason to be ethical.

Values and ethics are not feel-good concepts that should be taught at the end of an MBA program, as it is currently often done.

Business ethics represent a material competitive advantage that is difficult to replicate and has a tangible financial impact.

In Michael Porter’s thinking, ethical behavior is the ultimate competitive advantage since it requires people to adjust every aspect of their life, thinking, philosophy, and activities to achieve this advantage. Doing that is very difficult, which means many would not do it.

This means it is hard to copy your competitive advantage. This means you are unique. It is worth understanding and building your life around this. It is one of the most formidable tools you can have to build your career and life.

When you begin your adult life, your business ethics is determined by what you tell people.

Since you do not have much of a track record and since working with you is usually of a low financial risk (your salary is lower when you start out versus probably much higher later in life), people merely assess you based on what you say. As you mature and/or the financial risk of being associated with you increases, your ethical position is increasingly determined by your actions and track record.

When we are young, we tend to use the few signals we have to show our worth and standing. These typically include having Harvard and McKinsey on your resume and a GMAT score north of 760.

That is why people are obsessed with accumulating them. You don’t yet have a track record of being outstanding in a specific line of work, so people use these metrics to determine if you have a good standing in the world.

Your worth and standing in life are determined by accolades.

As your career progresses, you begin to be judged more by your actions and less by these accolades.

If you lack character and integrity, you always need more hard skills and career-enhancing data points to compensate for your lack of ethics/weak reputation.

Think about this: if you are a horrible person who screams at staff and throws a tantrum on a daily basis, you will probably still have a job if you create wealth or have the accolades that signify the ability to create wealth.

Lack of values forces you into this skills arms race because you do not have a reputation which encourages people to work with you. You need some other incentive to encourage people to work with you.

As you mature your business ethics are 100% judged by your actions.

If you are someone whom people trust implicitly, they will hire you just because having you there signals enormous credibility and because they know you will do the right thing. That is one of the reasons the most elite consulting and law firms are hired.

It is not just because they can do something many other consulting firms cannot do. It is because when the chairman of the board is offered a report from these firms, there is an implied credibility. It is known that these firms have a reputation for walking out of the engagement if it is wrong for the client.

The fact that they completed the engagement is a credibility stamp on the report.

In other words, these firms have developed a track record of taking short-term pain (walking out of engagements or not undertaking engagements and losing revenue from such engagements) to do what each firm thinks is right. It takes years to build true credibility.

Other firms that do not have such credibility look for other ways to be hired. They look for technical skills to impress the client. They may claim to have a new methodology, lower prices, etc. So, you see how this plays out.

Without credibility and a strong ethical standing, they have to bear a steep cost to entice clients to work with them.

Also, note that two consulting firms growing very fast may be enjoying high growth for very different reasons. One could be growing fast because it is benefiting from its credibility in the market, which was built years ago. Another could be growing fast since it is discounting fees and paying too much for talent. In other words, not all growth is equal. The drivers of that growth matter enormously.

Of course, business ethics is a major sustainable competitive advantage outside of consulting as well, for those of you not in consulting.

Warren Buffet and business ethics

Let’s use a well-known example, but analyzed through the lens of integrity, credibility, and ethics. In 1956, Warren Buffett returned to Omaha, after a stint at Graham-Newman in New York City, where he worked for his teacher and idol Ben Graham. Warren had about $174,000 and he was going to “retire.”

In pursuit of his goal of becoming a millionaire, he started a partnership like Graham-Newman’s sister hedge fund, Newman & Graham. This would allow him to raise money to manage and invest it from his house, putting money into the same stocks he bought for himself.

The plan was to invite friends and family into the partnership. The key for Warren was to deal only with people who he was sure trusted him.

Eventually, he opened multiple partnerships and partners no longer had to be his family and friends. His name was passed along like a secret with advice to “invest with Warren Buffett if you want to get rich.” But one thing stayed the same—the people who invested trusted Warren.

The reputation that Warren developed by being consistently transparent and honest with his partners became his sustainable competitive advantage. This is in addition, of course, to his highly intelligent approach to investing and phenomenally hard work.

By 1960, Warren no longer asked people to invest; they had to bring it up. This is the same strategy Marvin Bower used for McKinsey.

If the other party asks you for your service, they don’t have a “prove you are worthy” attitude. You are doing them a favor and not the other way around. Of course, this only works when people trust you, as they did in Warren Buffett’s case and in Marvin Bower’s case.

The real cost of a lack of business ethics

Imagine how tough it is to work for a client who does not trust you, constantly checks your work, and always wants you to prove your worth? In the worst cases, distrustful clients ask for changes that may not be helpful, refuse your advice, and then blame you when their approach failed. That is a pretty horrible experience.

Yet, if you do not take the time to build your selfless credibility, that is where you will be in life.

What does this mean for your career in practical terms? It means that, at a certain point, technical skills and career-enhancing degrees/designations have declining returns.

They tend to have the most returns when you are young and then quickly decline like the resale value of a car.

Someone with adequate skills from an unknown school who is seen as highly trustworthy will almost always, over the long term, be appointed over the vastly skilled person who studied at an elite school but is seen as untrustworthy.

Too many young consultants focus on technical skills and career-enhancing designations. Yet, credibility is more important in the long term to get to the next level. Technical skills, and at that just good enough technical skills, are the foundation.

Think about it. Let’s say you are the world’s greatest financial modeler.

What does that mean?

Does it mean your models are technically perfect, but no one hires you since you have a poor reputation?
Does it mean your models are technically perfect, you are hired, but not listened to much since clients question your motives?
Does it mean your models are good enough and you can influence the most senior decision makers?

Which of the three options above creates the most value to clients?
In another scenario, does it mean that when you are 59 years old, you are still going to build financial models?

What does it mean to be the greatest?

We erroneously think if we have technical skills and impressive career-enhancing designations, everyone will want to hire us.

That is not always true. At a certain age, you have to break out into managing people and leadership. And when it comes to managing people, and leadership, the trust element becomes crucial.

Do people trust you to follow you?

Do people trust you to put you in a leadership position?

This is where a reputation for business ethics, which is earned by being consistently ethical over a prolonged period of time, leads to a formidable and sustainable competitive advantage.

It cannot be won overnight via grandiose action, it cannot be bought, and it cannot be faked. And the true, and only, test of ethics is whether you can cite numerous examples of having left money on the table because it was not the right thing to do.

Unless you have left money on the table without hesitation, you probably have never lived by your values or your values are inappropriate.

As Michael Porter said, a competitive advantage is not one single thing you do, but how you organize your life to produce this advantage. That means you need to change everything. Far too many people will not understand the importance of values and ethics. And of those who understand, the majority will give up in trying to organize their lives to make this a sustainable process.

This article is adapted from the soon to be released revised and updated edition of “Succeeding as a Management Consultant.”