What Drucker on Business Ethics Can Teach You About Leadership

Drucker was extremely ethical in his outlook and all he did. On a personal level he was one of the most ethical individuals I have ever met. However from both his writing and classroom lectures, it was clear that he struggled mightily to arrive at basic ethical principles which were essential since he believed that ethical behavior was an absolute requirement of all organizational leaders. In his study of leadership led him to the conclusion that while followers would forgive a leader much, they would not forgive the leader’s lack of integrity.

Drucker looked at ethics from various viewpoints. He began with ethical authorities from the western tradition and expanded his search to both geographically and historically. He found one point of complete agreement: that there is only one ethics, one code of individual behavior in which the same rules apply to all leaders. However there were various types of extenuating circumstances within this tradition. First, clemency might be granted to a violator who commits violations of the code under certain circumstances.

"Thou shalt not steal," is one of the Ten Commandments. Yet a mother stealing to feed a starving child might be excused. Differences due to different social or cultural mores might also be accepted. As a result, practices of questionable morality in one locality might not only be considered acceptable, they could be considered quite ethical.

Drucker noted that bribery was hardly desirable from the viewpoint of the victim from who a bribe was exhorted, and it had been made illegal in the United States by a law prohibiting the payment of bribes to obtain foreign contracts. This was cited as a gross violation of "business ethics."

Drucker was very clear on this. He thought it stupid to pay bribes. But was paying bribes in itself only a violation of the law or of business ethics? Most countries have laws against bribery. Yet it is a fact that bribery, as we define it, is routine and expected in some of these countries. For example, some countries that expect "baksheesh" as the traditional way of doing business in their country ignore any laws that may have been enacted as "window dressing" for countries not having this as part of their own culture.

Drucker noted that a private citizen who was extorted to pay a bribe to a criminal might be considered foolish or a helpless victim of intimidation. And certainly paying extortion was never desirable. But this was clearly not an ethical issue on the part of the individual forced to pay. Drucker strongly objected to this "new business ethics" which asserted that acts that are not immoral or illegal if done by private citizens became immoral or illegal if done in the context of a business organization without examining the circumstances. They might be stupid, they might be illegal, and they might be the wrong thing to do. However, they were not necessarily "business ethics."

The Ethics of Social Responsibility

Drucker next turned to casuistry. This might be called cost-benefit ethics, or ethics for the greater good. Essentially it says that someone in power, a CEO, a king, a president, has a higher duty if their behavior can be argued that it confers benefits on others. So, it is wrong to lie, but in the interests of "the company," "the country," or "the organization," it sometimes has to be done. Drucker called this "the ethics of social responsibility."

This sounds very high minded, but Drucker maintained that it was too dangerous a concept to be adopted as business ethics because it would become a tool of a business leader to justify what would clearly be unethical behavior for anyone else. Drucker looked further.

To be prudent means to be careful or cautious. It is a rather unusual philosophy for an ethical approach in managing, but admittedly it has some benefits to it. When I first became an Air Force general, we were sent to a special course for new generals. During this course we were given lectures and advice by senior military and civilian leaders. I do not recall whether what was said on this subject was said by a senior civilian official, or by a senior general, but it struck us as pretty good advice. "Never do anything you wouldn’t want seen on the front page of The Air Force Times," he said.

Drucker gave a somewhat similar example. He said that Harry Truman, at the time a U.S. Senator, gave this advice to a general officer witness before his committee in the early years of World War II: "Generals should never do anything that needs to be explained to a Senate Committee—there is nothing one can explain to a Senate Committee."

Drucker thought that this approach may be pretty good advice for staying out of trouble, but it is not much of a basis for ethical business decision making. For one thing, it doesn’t tell you anything about the right kind of behavior. For another there are decisions that a leader must take which are risky and which may be difficult to explain, especially if things go wrong. But, they may nevertheless be the correct decisions to take.

Drucker also thought through what he called, "The Ethics of Profit." Now this is not what you might think, so don’t skip this. Drucker did not say anything about limiting profits. Much to the contrary, Drucker wrote that it would be socially irresponsible and most certainly unethical if a business did not show a profit at least equal to the cost of capital because failing to do so would waste society’s resources.

Drucker believed that the only logical rationale for the justification for "profit" was that it was a cost. He exhorted business leaders as follows: "Check to see if you are earning enough profit to cover the cost of capital and provide for innovation. If not, what are you going to do about it?"

Drucker stated that profit as an ethical "metric" rested on very weak moral grounds as an incentive and could only be justified as such if it were a genuine cost and especially if it were the only way to maintain jobs and to grow new ones.

I found it interesting that during the rise in gas prices (prior to their dramatic fall) in 2008 produced the following response by one refining company CEO when challenged by a Congressional investigating committee: "There is no ‘profit’. Every dollar goes into to exploration or research and development and is needed to run this business." Drucker would have agreed, although this would have probably been extremely difficult for someone not in the oil business to understand or accept, and clearly did not satisfy the Committee, confirming Truman’s advice to the testifying general.

Drucker called Confucian ethics "the most successful and most durable of them all." In Confucian ethics the rules are the same for everyone, but there are different general rules which vary according to five basic relationships, all based on interdependence. These five are superior and subordinate, father and child, husband and wife, oldest brother and sibling and friend and friend.

The right behavior in each case differs in order to optimize the benefits to both parties in each relationship. Confucian ethics demands equality of obligations, of parents to children and visa versa; of bosses to subordinates and visa versa. All have mutual obligations. Drucker points out that this is not compatible with what is considered business ethics in many countries including the U.S. where one side has obligations and the other side rights or entitlements.

Though he clearly admires Confucian ethics which he calls "The Ethics of Interdependence," they cannot be applied as business ethics, because this system deals with issues between individuals, not groups. According to Confucian ethics, only the law can handle the rights and disagreements of groups.

But what about doing things for the customer that are "clearly unethical?" Can business ethics be defined in this manner? This came up in Drucker’s class, and I also found his identical response in one of his books: "Hiring call girls to entertain visiting executives does not make you unethical. It merely makes you a pimp."

Drucker concluded that business ethics as we know it today are not that at all. If ever business ethics were to be codified, Drucker thought they ought to be based on Confucian ethics, focusing on the right behavior rather than misbehavior or wrong doing. In the meantime, Drucker believed that leaders should adopt the following into their personal philosophy of ethics:

For managers and business leaders we can learn about the ethics of personal responsibility from the physician Hippocrates: "Primum Non Nocere." Which in English means, above all (or first) do no harm.

The mirror test: What kind of person do I want to see when I look into the mirror every morning?

First published on Customer Management IQ