Researcher examines directors' ethical choices

A new study by researchers at SIUC's College of Business and Administration found corporate directors abandon their personal ethics in order to maximize shareholder values.

Jake M. Rose, associate professor in the School of Accountancy, interviewed several Fortune 500 directors, discovering they would consistently give up corporate social responsibility for increased shareholder value, even when their personal morals and ethical standards suggest alternative courses of action. 

"The study reveals why corporations run by directors with strong ethical standards often make decisions that adversely affect the health and welfare of society," Rose said.

The paper, titled "Corporate Directors and Social Responsibility: Ethics versus Shareholder Value," will appear in a forthcoming issue of the "Journal of Business Ethics."

Rose conducted an experiment where influential corporate directors from Fortune 500 firms made decisions that drew upon personal ethics and directly affected corporate social responsibility. "This is the first research to bring high-level board members into controlled laboratory conditions and directly measure their decisions regarding business strategies that can adversely affect society, and the results are shocking," Rose said.

Directors in the study made business decisions either from the perspective of a corporate director or from the perspective of a business owner. The profit-maximizing choice in each decision scenario required that the corporation violate social responsibility.

When acting as directors, the business leaders consistently chose profit-maximizing business strategies, even when these choices were known to cause serious harm to society including the health and lives of citizens. However, when directors made the same decisions from the perspective of a business owner, directors did not consistently trade ethical standards or social responsibility for wealth maximization.

In fact, when participants made choices from a director perspective they were nearly eight times more likely to intentionally harm society to promote profit maximization than were participants making the same choices from a business owner perspective.

"The research reveals that the corporate directors participating in the experiment recognized the ethical implications of their decisions, but chose to ignore their personal ethical values when making decisions from a director perspective," said Rose.

The directors favored shareholder value over personal ethical beliefs because "they perceive that their corporate charters and the structure of the corporate organization require them to act in the best interest of shareholders, not society. The directors also believe that they are legally liable for failing to maximize shareholder value, but are much less liable for failing to act in the interest of society," Rose said.

Rose argues simply increasing ethics instruction at business schools might not change that pattern because the lack of corporate social responsibility appears largely driven by perceptions of corporate law, rather than personal ethics. The answer, Rose believes, is to change corporate law rather than increase ethics education.

"The directors participating in the study had strong moral and ethical values, and they clearly acted upon these values when their decisions were not constrained by legal duties to shareholders. However, when legal duties to shareholders require profit maximization, directors are forced to suppress their personal beliefs and pursue any legal means of profit maximization," he said. "If we want our corporate directors to act in the interests of all stakeholders, including society, then corporate charters and ethics mandates must move away from a singular focus on the shareholder."

- Sun Min