Applying virtue ethics to business: The agent-based approach
By: John Dobson.
It ca be argued that the presence of what are in a
slightly old-fashioned terminology called virtues in fact plays a
significant role in the operation of the economic system.
- Kenneth Arrow
- Kenneth Arrow
Introduction
There are two basic approaches to integrating ethics
in business: the action-based approach, and the agent-based approach.
The traditional approach is action-based in that it focusses on
developing rules or guidelines to constrain management's actions. These
rules or guidelines generally manifest themselves in corporate
codes-of-conduct, or codes-of-ethics.
Contrarily, rather than the action-based focus on
rules governing action, the agent-based approach concerns the
fundamental character and motivations of the individual agent. Under the
agent-based approach, moral behavior is not limited to adherence to a
rule or guideline but rather involves the individual rationally pursuing
moral excellence as a goal in and of itself. In essence, ethics becomes
central to the rationality concept as an objective rather than a
constraint: "something positively good, ..something to be sought after"
(Ladd, 1991, p. 82).
Agent-based approaches generally derive their
philosophical foundation from virtue-ethics theory. This theory is
attracting increasing interest from business ethicists. In essence, the
'virtue' in virtue-ethics is defined as some desirable character trait,
such as courage, that lies between two extremes, such as rashness and
cowardice. Thus the 'virtuous' agent is involved in a continual quest to
find balance in decision-making. Such an agent does not apply any
specific 'rules' in making decisions, but rather attempts to make
decisions that are consistent with the pursuit of a particular kind of
excellence that in turn entails exercising sound moral judgement guided
by such 'virtues' as courage, wisdom, temperance, fairness, integrity,
and consistency.
Rather than stepping outside one's professional
role, virtue ethics would have one evaluate an ethically charged
decision from within that role. Ethics becomes contextual and connected
to a given person and situation, rather than separate and abstract to
person and place. This is clearly a very different concept to that of
ethics as adherence to a set of abstract rules, which is so common in
contemporary professional codes of conduct.
For example, a financial accountant may be able to
enhance her company's reported results of operations by crafting a
sale-leaseback arrangement whereby some of the company's assets are
sold, a gain is recorded, all the appropriate accounting pronouncements
are adhered to, and the company still has use of its assets. The intent
of the transaction was never to rid the company of unwanted assets, but
rather to record a gain and thus possibly avoid breaching debt-covenant
agreements or circumvent regulatory requirements.
In order to examine whether or not this example of
creative financial-accounting is unethical, action-based approaches
would have the individual step out of her accounting role and don the
hat of a Kantian (e.g., "does this action violate the rights of users of
the financial statements to fairly presented financial information?"),
or of a utilitarian (e.g., "does this action maximize the welfare of all
stakeholders?"). In this approach, the agent adopts a type of moral
schizophrenia in which being a good professional in the sense of being
an economically effective accountant becomes separable from being a good
professional in the sense of being an ethical accountant. Thus, given
this action-based approach, an accountant could be a 'good' accountant,
in the sense of being very efficient and effective, yet at the same time
not be a 'good' accountant, in the sense of being ethical.
The great strength of virtue ethics is that it
overcomes this moral schizophrenia. Ethics is no longer merely a list of
constraints on behavior. For example, our financial accountant, if she
were virtuous, would not have to weigh the goal of maximizing firm
profits against the constraints of an ethics code. Maximizing firm
profits would simply no longer be her ultimate objective.
Indeed it is this holistic motivational focus,
transcending contextual specificity, that is the great contribution of
virtue-ethics theory. This theory provides an alternative value base
upon which to build a morally sensitive theory of financial economics.
At first blush, however, the virtue-ethics approach
might appear too esoteric for application in business: How could a
financial manager pursue moral excellence through virtue? On closer
scrutiny, however, the focus of virtue-ethics on the fundamental
motivations of the agent actually dovetails rather neatly with the
increasing focus among financial economists on the motivations of agents
in business.
Virtue Ethics: An Overview
Virtue ethics is concerned with pursuing a certain
type of morally inclusive excellence. Aristotle called it eudaimonia,
which can be roughly translated as 'happiness', or 'human flourishing'.
For present purposes, this approach to ethics can be thought of as
exhibiting four basic attributes. Its primary attribute is a strong
emphasis on the importance of certain generally accepted virtues of
character; indeed it is through honing and perfecting these virtues that
an individual becomes truly ethical. Secondly, a strong emphasis is
placed on the existence of an active community that nurtures these
virtues. Thirdly, virtue-ethics theory makes clear that in the moral
life one cannot rely merely on rules or guidelines, in addition an
ability to exercise sound moral judgement is requisite. Finally, the
successful identification and emulation of moral exemplars or role
models is essential for the dissemination of morality within the
aforementioned nurturing community.
The remainder of this article will describe virtue
ethics from these four perspectives: the role of the virtues, the role
of community, the role of moral judgement, and the role of exemplars.
The Role of The Virtues
An essential feature of rationality within virtue
ethics is that, rather than focussing on the material goals of the
agent, it focusses on the character and motivations of the agent, and on
the agent's ability to pursue a certain very particular type of
excellence. A characteristic of this excellence is that its pursuit
necessitates adherence to certain virtues or traits of character.
These virtues place emphasis on the motivation for an action and entail
the exercise of sound judgement. "Virtue lies in the reasons for which
one acts rather than in the type of action one performs" (Annas, 1995,
p. 250). Virtues can be split into two broad categories, namely
self-regarding and other-regarding:
When, furthermore, we look at the whole range
of traits commonly recognized as virtues, we once again see that
self-regarding and other-regarding considerations are both capable of
underlying the kind of high regard that leads us to regard various
traits as virtues. Justice, kindness, probity, and generosity are chiefly admired for what they lead those who possess these traits to do in their relations with other people, but prudence, sagacity, circumspection, equanimity, and fortitude are esteemed primarily under their self-regarding aspect, and still other traits - notably self-control, courage, and (perhaps) wisdom in practical affairs
- are in substantial measure admired both for what they do for their
possessors and for what they lead their possessors to do with regard to
other people. [Slote, 1992, p. 9, emphasis added]
A succinct definition of virtue is supplied by
MacIntyre: "A virtue is an acquired human quality the possession and
exercise of which tends to enable us to achieve those goods which are
internal..." (1984, p. 191). He distinguishes between internal and
external goods as follows:
It is characteristic of what I have called
external goods that when achieved they are always some individual's
property or possession. Moreover characteristically they are such that
the more someone has of them, the less there is for other people.
...External goods are therefore characteristically objects of
competition in which there must be losers as well as winners. Internal
goods are indeed the outcome of competition to excel, but it is
characteristic of them that their achievement is a good for the whole
community who participate in the practice. [1984, pp.190-191; emphasis
added]
The pursuit of external goods, therefore, is no
longer recognized as the ultimate end of human endeavor, but rather as a
means to the achievement of excellence. Martha Nussbaum defines this
excellence as "the end of all desires, the final reason why we do
whatever we do; and it is thus inclusive of everything that has
intrinsic worth [i.e., internal goods], lacking in nothing that would
make a life more valuable or more complete" (1991, p. 38).
A central feature of virtue ethics is its concept of
professional development as fundamentally a moral process; "one cannot
be practically rational without being just - or indeed without the other
central virtues" (MacIntyre, 1988, p. 137). Thus rather than being some
peripheral appendage or constraint on a substance-based rationality
concept, this approach places morality at center stage. In a business
context, Kenneth Goodpaster lists five key virtues:
- (1) Prudence - neither too short-term nor too long-term in time horizon; (2) Temperance - neither too narrowly materialistic (want-driven) nor too broadly dispassionate (idea-driven); (3) Courage - neither reckless nor too risk-averse; (4) Justice - neither too anarchic regarding law nor too compliant; (5) Loyalty
- neither too shareholder-driven (private sector thinking) nor too
driven by other stakeholders (public sector thinking). [1994, pp. 54-55]
Clearly, to achieve excellence through the exercise
of these virtues of character requires a sense of moderation. Thus
managers who are said to be 'weathering the storm' or 'sticking to their
guns' may well be exercising the virtue of courage. But so might a
manager who 'knows when to call it quits'. It is the reason or judgement
underlying the action that will determine whether the agent is truly
courageous. Thus a virtue is not a maximum or a minimum. Unlike
rationality in the finance paradigm, practical rationality concerns
moderation and balance.
The crucial difference, therefore, between
traditional approaches to business ethics and the approach adopted in
virtue-ethics theory is that the latter focusses on the character and
motivations of the agent, and on the agent's ability to pursue
excellence through virtuous acts. As mentioned earlier, Klein succinctly
distinguishes between the traditional approach to business ethics and
the new virtue-ethics approach by labelling them as "action-based" and
"agent-based" respectively: the former tending to focus on moral rules
that can be generally applied to contractual situations (e.g. Kantianism
and utilitarianism), whereas virtue ethics concerns the aspirations of
the agent, and the agent's ability to exercise the moral 'virtues'.
Klein describes a similar individual in his analysis of Cervantes's Don Quixote:
The ideal of craftsmanship is to create that
which has quality or excellence; personal satisfaction, pride in
accomplishment, and a sense of dignity derived from the consequent
self-development are the motivations. In an 'excellent' company it is
this ideal that permeates the firm, and management should provide the
moral example of such an ideal; a business management craftsman attempts
to create a quality organization, and quality products and services are
the result of such an organization. [1998, p. 55]
Klein's managers recognize their business universe
as essentially one of chaotic disorder and unpredictability where rules
of logic and rationality will never fit comfortably. These managers
endeavor to achieve some sort of balance and harmony in their chaotic
environment. In this endeavor they are not quixotic, but rather are
guided by conceptions of quality, excellence, the Good, Aristotelian
eudaimonia, and by conceptions of desirable character traits -- virtues
-- that may lead to these ideals. The acquisition of these character
traits and the concomitant pursuit of these ideals is not achieved
simply by the application of certain rules of logic, or of rationality.
Indeed the whole pursuit is characterized by a marked absence of rules
and set goals.
The Role of Community
Virtue ethics theory also has implications for the
role of the firm or professional organization. For the virtues to
flourish requires a conducive infrastructure; "one cannot think for
oneself if one thinks entirely by oneself, .. it is only by
participation in a rational practice-based community that one becomes
rational .." (MacIntyre, 1988, p. 396). MacIntyre defines a practice as ...
- .. any coherent and complex form of
socially established cooperative human activity through which goods
internal to that form of activity are realized in the course of trying
to achieve those standards of excellence which are appropriate to, and
partially definitive of, that form of activity, with the result that
human powers to achieve excellence, and human conceptions of the ends
and goods involved, are systematically extended. [1984, p. 187]
Thus rationality in virtue ethics is a shared
rationality with a shared conception of what is ultimately desirable in
all human endeavor. This shared conception must be supported by, and
indeed be the raison d'être of, the organizations and institutions that
control and direct human activity. This infrastructure is an aspect of
what was known in the city-states of ancient Greece as the polis: "the
form of social order whose shared mode of life already expresses the
collective answer or answers of its citizens to the question 'What is
the best mode of life for human beings?'" (ibid., p.133). Such an
infrastructure is essential for virtue ethics:
- Aristotle is articulating at the level of
theoretical enquiry a thought inherited from the poets when he argues in
Book I of the Politics (1252b28-1253a39) that a human being separated from the polis
is thereby deprived of some of the essential attributes of a human
being. .. A human being stands to the polis as a part to its whole. ..
For the polis is human community perfected and completed by achieving its telos. [Ibid., p.96-97]
The virtue-ethics approach thus casts the firm or
professional organization in a role that is far more active and
intrusive than merely what Jensen and Meckling call a "contractual
nexus" (1976) or what Miller describes as a "wealth creating machine"
(1986). The firm becomes a nurturing community, a polis. "Corporations
are real communities, ..and therefore the perfect place to start
understanding the nature of the virtues" (Solomon, 1992, p.325). Solomon
emphasizes the link between virtue-ethics and this expanded role of the
firm as a nurturing community: "It [virtue-ethics] is an Aristotelian
ethics precisely because it is membership in a community, a community
with collective goals and a stated mission - to produce quality goods
and/or services and to make a profit for the stockholders" (Solomon,
1992, p.321). Within the rubric of virtue-ethics theory, therefore, the
goals and aspirations of the individual are nurtured and directed by the
business organizations and institutions of which that individual forms a
part.
The Role of Moral Judgment
Another significant aspect of virtue ethics is its
rejection of a rule-based approach to moral education. Acting ethically
in a given situation is less a function of rule adherence and more a
function of exercising sound moral judgement. MacIntyre makes this very
clear:
- What can never be done is to reduce what
has to be learned in order to excel at such a type of activity to the
application of rules. There will of course at any particular stage in
the historical development of such a form of activity be a stock of
maxims which are used to characterize what is taken at that stage to be
the best practice so far. But knowing how to apply these maxims is
itself a capacity which cannot be specified by further rules, and the
greatest achievements in each area at each stage always exhibit a
freedom to violate the present established maxims, so that achievement
proceeds both by rule-keeping and by rule-breaking. And there are never
any rules to prescribe when it is the one rather than the other that we
must do if we are to pursue excellence. [1984, p. 31]
This does not mean that, for example, derivatives
traders should ignore exchange standards or codes of conduct, but rather
that these should be viewed - not as the entire professional ethic -
but as the foundation from which to pursue the professional ideal in
this activity. This professional ideal will be defined in terms of the
internal goods specific to the practice of derivatives trading, but more
on this later.
The Role of Moral Exemplars
The role of exemplars is critical for the
application of virtue ethics because it is from these individuals that
the virtues are disseminated throughout the profession. Thus, in virtue
ethics, ethics is something which is learnt through observation
of others' behavior. For example, in his article on "Good Works",
Michael Pritchard concludes that "beyond discussing codes of ethics,
principles of right and wrong, dilemmas ... and moral disaster stories,
we need stories of a different sort - stories of good professionals whose lives might inspire emulation"
(p. 170, emphasis added). A resurgence in recognition of the critical
importance of moral exemplars is supplied by cognitive science in its
invocation of "exemplar theory". Alvin Goldman summarizes the theory as
follows:
- Moral theorists often assume that people's
usage of moral terms is underpinned by some sort of rules or principles
they learn to associate with those terms: rules governing honesty, for
example, or fairness. The exemplar theory suggests, however, that what
moral learning consists in may not be (primarily) the learning of rules
but the acquisition of pertinent exemplars or examples. This would
accord with the observable fact that people, especially children, have
an easier time assimilating the import of parables, myths, and fables
than abstract principles. A morally suitable role model may be
didactically more effective than a set of behavioral maxims. [1993, p.
341]
In summary, what this overview of virtue-ethics
theory makes clear is that an individual, whether finance professional
or otherwise, cannot be ethical in a vacuum. The individual must be
educated in the virtues by a nurturing community, and by the guidance of
exemplars. This approach takes ethics far deeper than merely a credo or
code of conduct. Ethics becomes integral to the professional's whole
conception of what it is he or she is about. Rather than the opportunist
of financial agency theory, the virtuous agent adopts a different
notion of substantive rationality: Practical Rationality.
Virtuous behavior: Practical Rationality
A chess championship recently took place in London
between the reigning champion, Gary Kasparov, and a British challenger,
Nigel Short. The winner of the tournament was to receive some $2 million
in prize money. Imagine that one of the players, say Kasparov, is
'rational' in the economic sense as invoked by the finance paradigm,
while the other player, Short, is 'rational' in the sense of
Aristotelian practical rationality as invoked by virtue-ethics theory. How, exactly, would these two individuals differ in their approach to the chess tournament?
Clearly the actions of the two agents may be
indistinguishable. They would both be playing chess to the best of their
ability, and would both be playing to win. Clearly, also, either player
could win. The difference between the two players would likely rest
entirely on their respective motivations for winning. Kasparov's
motivation would derive from the external goods to be gained from
playing chess, namely the $2 million prize money and perhaps also the
fame and power that comes from being 'the champion'. Contrarily, Short's
motivation would derive from the internal goods to be gained
from playing chess. These goods are less easily identified. They are, as
MacIntyre notes, "those goods specific to chess, .. the achievement of a
certain highly particular kind of analytical skill, strategic
imagination and competitive intensity .." (1984, p. 188).
In essence, Kasparov views chess as a means to an
end, where the end is wealth, fame, and power. Short, on the other hand,
views chess as an end in itself. To the practically-rational Mr. Short
chess is a "practice"; indeed an understanding of the concept of a
practice is central to an understanding of practical rationality.
What the rationality embedded in virtue-ethics makes very clear is that excellence within a practice is in and of itself
a moral excellence; the pursuit of excellence in a practice
necessitates the exercise of the virtues. "A virtue tends to enable us
to achieve those goods which are internal to practices and the
lack of which essentially prevents us from achieving any such goods"
(1984, p. 191, emphasis added). Thus a practically rational financial
manager would be one who views financial management as a practice, with
goods internal to the activity itself. Contrarily an economically
rational financial manager is one who views financial management
primarily as a means to the attainment of external goods. This latter
financial manager or agent is the one who currently populates the models
of agency theory.
Both types of financial manager will pursue what
they perceive as their self interest. In the case of practical
rationality, however, the agent's self interest is defined in terms of
the pursuit of excellence within the practice. Furthermore this pursuit
will be undertaken through the exercise of the virtues within a
community (the polis).
Thus practical rationality is an interactive or
connected rationality. A practically rational agent pursues happiness
or excellence (what Aristotle termed eudaimonia) while realizing
that this pursuit cannot be successfully undertaken opportunistically:
the achievement of happiness requires the exercise of the moral virtues
such as honesty in dealings with others.
Acid-Test: Derivatives Trading
Many outside observers view derivatives trading --
as undertaken by hedge funds such as the George Soros fund, or Long-term
Capital Management (LTCM) -- as the epitome of the ugly face of global
capitalism: it appears to be an activity premised purely on the
short-term acquisition of material wealth through the creation of
complex and artificial financial instruments. But, as is usually the
case, on closer scrutiny things are not so simple.
Although outright speculation undoubtedly explains
much derivatives trading activity, it does not explain the whole market.
Take, for example, two of the most popular trading strategies employing
derivatives, namely portfolio insurance and index arbitrage. Without
getting into the technicalities, the essential objective behind
portfolio insurance is -- as the name implies -- to insure a portfolio
against heavy losses. This is generally achieved by entering into
derivatives positions that become profitable if the portfolio to be
insured loses value. Similarly, the objective behind index arbitrage is
not to maximize profits ad infinitum but rather to lock in a
modest risk-free return. This is achieved by exploiting the 'spread'
between the value of a futures contract and the corresponding spot
value.
Rather than simple wealth maximization, therefore,
such strategies are better described as risk management. Furthermore,
they involve the application of a substantial body of sophisticated
knowledge that evolves through time. There is an excellence to pursue
here, namely the development of a trading strategy that successfully
meets some risk-management goal. The activity is also communal: traders
work in various groups that pursue certain common goals. For example,
the traders in a 'pit' on the
London-International-Financial-Futures-Exchange (LIFFE) share the common
goal of maintaining as liquid a market as possible for their particular
contract; or the traders in a trading room of a financial institution
share the common goal of meeting performance targets and designing
contracts that meet the risk-management needs of clients. But could this
activity be reasonably viewed as what MacIntyre defines as a practice?
There are three basic characteristics of derivatives trading that define it as a practice within virtue ethics:
- First, it establishes its own standards of
excellence in the design and successful implementation of the various
trading strategies summarized above.
- Second, there are particular internal goods
specific to derivatives trading. As always with the concept of internal
goods it is hard to find words to define them. In After Virtue, in the
context of chess, MacIntyre defines the internal goods as analytical
skill, strategic imagination and competitive intensity. All these would
seem to be eminently applicable to derivatives trading.
- Third, derivatives trading is undoubtedly
organic. These markets are continually changing as new strategies and
contracts are being developed all the time.
In short, there is no reason why the tenets of a
practice-based community cannot be applied to even the most
cold-bloodedly technical of business activities, namely derivatives
trading. Such a derivatives trading organization would be one in which
its members viewed themselves as engaged in the pursuit of the internal
goods unique to the practice of derivatives trading; e.g., the
successful application of the theoretical tools of option-pricing
theory, or the ability to design a portfolio insurance strategy that
meets as closely as possible the stated risk-management objectives.
Conclusion
For the virtues to be successfully applied to
business, business activity must be viewed as a 'practice' as defined
above. Whether or not any business activity qualifies as a practice
depends less on the type of activity, and more on the character and
motivations of the people engaged in it. The challenge that any
organization faces, therefore, is to educate managers as to the
desirability of virtue-based behavior.
As a 'true professional', the good manager strives
to achieve a certain specific type of morally inclusive excellence. One
critical feature of this excellence is that its achievement entails
adherence to certain 'virtues' of character, such as honesty, fairness,
prudence, and courage. The excellence pursued by the true professional,
therefore, is not something that can be measured in strictly material
terms, it is a moral as well as an economic excellence. Albeit hard to
quantify, individuals or 'exemplars' who have achieved this excellence
are generally identifiable by their predisposition to place personal
integrity over and above any material considerations.
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