https://sloanreview.mit.edu/article/developing-versatile-leadership/

Making value from the invaluable

29 marzo 2020 -

Is it possible to quantify, using economic variables, what is in principle not subject to economic evaluation? A recent Harvard research seems to have achieved such an ambitious goal, but this inevitably makes ethical issues arise.

 

In the last few years, an increasing concern has developed with regard to the externalities of firms. An externality is the cost or benefit implied by an economic activity that affects a third party who did not choose to incur that cost or benefit and without this being reflected in market prices. They are one of the main justifications for public intervention in the economic sphere. On one hand, governments should reduce negative externalities through mindful regulation. On the other, they should incentivize positive externalities, which usually are not the firms’ most pressing priorities, since they do not directly result in any monetary advantage.

The profitability of a company stays unaltered both if the air of our neighborhood becomes unbreathable due to industrial waste and if we enjoy the benefits of gentrification brought about by a successful commercial activity. Can businesses, in principle, be ethical? If so, how to apply analytical tools to ethics and to subsume what is qualitative par excellence under the scope of the queen of  social sciences, namely economics? The former is a philosophical interrogation, the latter a methodological one. The consequence is that they are respectively dealt with by two different research approaches, which urge us to find a common synthesis in order to successfully coordinate and inspire our practical response. 

Ethics and Business: an inescapable aut-aut ?

 

“What do we mean when we use expressions such as ’philosophy of management’ or ’ethics of management’?”, wonders Prof. Ivo De Gennaro (Free University of Bozen-Bolzano)  in his paper “Building Leadership on the Invaluable – Towards the Groundworks for a Phenomenological Approach to the Philosophy of Management”. Indeed, this sounds like a tricky question, but one worth being asked. In our collective imagination, nothing is considered farthest from philosophical thinking than business administration: the former is the realm of ideas and theoretical assumptions, often seen as old-fashioned and detached from reality, while the latter totally devotes itself to the sphere of the “making”: making goods, services and ultimately profits. What is not equally acknowledged is the essential role that philosophy plays in the managerial setting.

Broadly speaking, philosophy is the ground of the entire Western way of thinking: the “break out” of metaphysics is what imprinted our peculiar stance on the world. Therefore, it also represents the ultimate source of economics. It may sound paradoxical, but the surprising nature of this statement is another proof of its enforceability: precisely because philosophy is the “core” of Western identity, it gives ground to every possible form of communication and understanding, though always remaining implicit. It is the layout of human experience as such, the background that lurks behind the stage of human history: we are so accustomed to it that we need an external boost to become aware of its everlasting presence.

Philosophy is an autonomous form of knowledge, with “autonomous” to be intended with its original Greek meaning: the union of “autos”, “the self”, and “nomos”, “law”. It follows that philosophy is a form of knowledge capable of defining its own laws, thus being self-regulated and therefore entirely free. No way to recognize the same essential freedom in economics! Every microeconomics course starts with a section dedicated to the tools employed in this kind of analysis, among which we find simplifying assumptions, i.e. statements which are taken as given and never questioned on their source and reliability.

This is what underpins the operative strength of science: if managers and economists of the past century had spent their days wondering about the sense of trade, a deeply philosophical question, the present-day globalization and prosperity would unlikely have been achieved. Hence, economics is not a self-grounded form of knowledge, but it rather requires a “deeper” form of knowledge capable of sustaining it by addressing the tools of its scientific method, namely philosophy. We can conclude that economics and sciences in general are its operative arm, i.e. the practical actions that stem from a sound knowledge of what lies at the very basis of our human reality.

Science vs ethics

At this point, we can formulate a provisionary answer to the question from which we have started: business, in principle, is not ethical. Ethics is the philosophical enquiry around the factual behavior of mankind with reference to good and bad. Ethics does not describe; it pre-scribes. Ethics does not explain and does not forecast; ethics evaluates. Indeed, no such thing as an “ethic explanation” may exist. What do exist are scientific explanations on one hand and ethical evaluations on the other. Ethics knows nothing. There is no final truth in ethics.

Ethics is not a science. Economics is: and here comes the underlying contradiction. If truth in the form of demonstrable proof, i.e. financial accounts of firms in the case at issue, is an attribute of science, then science cannot logically produce ethics. And it cannot do so because from de-scriptive statements one cannot deduce pre-scriptive assertions. Every philosophical approach is completely impregnable by scientific method, and science is sterile when it comes to metaphysical interrogation .

Empirical attempts

Provided that ethics has nothing to do with demonstrable knowledge, one wonders: what is, in practice, the role of ethics in the realm of rationality? The answer is a seminal one, and we have empirical evidence of that. Addressing the second question we have brought up, Harvard Business School is currently carrying out an Impact-Weighted Accounts Project, under the leadership of Professor George Serafeim. The Project is part of a broader Impact-Weighted Accounts Initiative (IWAI), which is a research-led joint effort by the Global Steering Group (GSG) and the Impact Management Project (IMP). “Our goal, with impact weighed accounts, is to drive the creation of financial accounts that reflect a company’s financial, social and environmental performance and motivate investors and managerial decision making” states Serafeim.

The idea is to connect impacts, i.e. changes in important positive or negative outcomes for people or the planet due to economic activity, and accounting statements. The key strategy is to develop analytical tools capable of converting impacts of diverse nature and origin into universal monetary terms, so that the performance of different businesses can be compared effectively and on the basis of standard unit s. This would imply several advantages: first of all, comprehensiveness. Once intangibles are transformed into a common currency, there are no blurred and subjective definitions of what an impact consists of anymore, therefore paving the way for increasing transparency.

Another interesting element stressed by prof. Serafeim is the inconsistency of the current approach to the analysis of environmental, social and governance (ESG) data. Indeed, ESG metrics are based on the measure of inputs and activities rather than impact, superficially assuming that similar inputs produce equal impacts across different circumstances. “If a firm spends money on employee training, but the training in fact has no effect on their skills-level, is the amount spent on training really the right proxy for value created for employees?” wonder the researchers.

Cost effectiveness should be taken into consideration through empirical assessment, in order to clarify to what extent inputs lead to the presumed impact. Serafeim himself envisages the risks associated with this line of reasoning: “Continuing to train business leaders to focus on monetary figures may erode their intuition about the inherent value of things such as social and economic inclusion or biodiversity”. On the other hand, in his perspective, the trade-off is eventually favourable to his monetization approach: the instrumental value of money is simply easier to grasp for managers, while the non-economic value – the human value, we may say – is inevitably into the grip of subjectivity.

So, maybe a prolific “et-et” ?

In ethical terms, the outcome of an action can never be objectively assessed . Ethics has an end in itself; economics has no end at all, in the sense that it consists in a process of endless – but measurable – empowering. Approaching ethical values in their sense with economic parameters is essentially insufficient . The proper role of economics when it comes to humanity is that of a custodian: numbers and rankings protect values which, in turn, require a philosophical perspective to be understood and ultimately attained. Meeting a parameter is a Pyrrhic victory if we have improved our calculation skills to detriment of our ability to see beyond, to interrogate ourselves about what is in the first place that requires protection. The result is a revolutionary overturning: economics becomes an ancillary attribute of ethics. Ethics of management comes into play precisely when we become aware of the limits of standardization, when our thinking capacity is at stake in the first place.

The philosophical approach required by it is not aimed at being a strategic tool for management , but at highlighting the circumstances where businesses are bound to operate and to what extent numbers may be of help in protecting what they will never be able to describe.

What is evident here is the necessity for economic progress and philosophy to move forward hand in hand. Impact weighted accounts, provided that they are sustained by a sound knowledge of the alterity, the qualitative difference, of what they are just conventionally evaluating, may be an effective solution to the conflict between the two. Indeed, particularly in the present epoch, the ethic of conviction (fiat iustitia, pereat mundus) must face the inevitable unintentional consequences of intentional human actions, i.e. it has to be balanced by an ethic of responsibility (fiat iustitia ne pereat mundus).

  • Capucine Causse

    Excellent article!