Ethics of... Entrepreneurship

Nobel Prize-winning economist Milton Friedman boiled down the ethical responsibilities of business to society to this: "There is only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Friedman believed that a firm's sole social expectation was to use its resources to earn profits honestly. It seems in the current economy that is easier said than done. The headlines are filled with stories of insider trading, bribery, faulty accounting and blatant fraud. Although large companies make the news, it has been argued that small business owners have an even tougher time with ethical problems, because of the simple seduction of easy money. Small business owners are faced with ethical issues everyday when they make management decisions that will affect the integrity of their company and its reputation; whether or not the right decision is in the business' financial interest.

Fortunately, a group of Baylor University researchers led by renowned management professor emeritus Justin Longenecker has found that the majority of small business owners strive to achieve the highest standards of truthfulness, fairness and trustworthiness in their business relationships. Longenecker and his colleagues have been studying entrepreneurs and their ethical drivers and business standards for over twenty years.

To begin studying how entrepreneurs do business, the researchers first had to see what made them tick. In Small Business Management (now in its 13th edition) Longenecker, along with Carlos Moore, professor of marketing, William Petty, professor of finance and W.W. Caruth Chair of Entrepreneurship, and Leslie Palich, associate professor of management, distinguish that the motivating factors of entrepreneurship are profit, independence, freedom, personal satisfaction and personal fulfillment.

Entrepreneurs -- who the Baylor professors define in their textbook as founders of business firms, second-generation operators of family-owned firms, franchisees and owner-managers who have bought out the founders of existing firms--are cut from a different cloth. Theorists characterize entrepreneurs by traits such as self-confidence, a high need for achievement and a propensity to take risks. They are people who initiate action and make decisions; this independence of action has long been recognized as a vital trait of the entrepreneur. Entrepreneurs generally believe their success depends on their own efforts, not luck, chance or fate; thus, they are in charge of their own destinies.

So, if entrepreneurs are characteristically more self-reliant and independent, do they hold themselves to higher ethical standards in business? And if so, what drives their ethical decision-making?

In the late 1980s, Longenecker set out to survey a broad swath of entrepreneurs from all 50 states to find answers to those questions. Since then, Longenecker and his research team of Joe McKinney, Ben Williams Professor of International Economics, and Moore have gauged ethical attitudes by taking entrepreneurs through a series of complicated vignettes - from padding expense accounts to concealing receipts from the IRS to collusive bidding and intellectual property piracy. Some present clearly unethical, even illegal, issues, whereas others present questions that involve more judgment. Just as in life, the right and wrong answers are not black or white.

Where the ethical boundaries are blurred is where leadership and integrity - or lack of it - emerges. The connection between integrity and profits is not simple and clear. At best, a business that operates with integrity, one that treats its employees fairly and stands behind its products and services, earns loyalty and patronage. The basic character of such a business enables it to prosper. But there is danger in oversimplifying the issue and assuming that honesty always results in profits.

"Sometimes honesty costs money," says Longenecker. "Even so, the entrepreneurs we most admire are people of principle who act in such situations by doing the right thing even though there is a financial cost. They choose the high road not because it is profitable, but simply because it is right. Of course, the short-term cost may lessen as a business builds a reputation of integrity. One of the very successful entrepreneurs who speaks to students at Baylor once commented on an opportunity lost by refusal to compromise on an ethical issue by saying, 'I lost the contract, but I could sleep at night.' It is that kind of entrepreneurial spirit that I like to encourage for those entering entrepreneurial careers."

Therefore, making ethical decisions and maintaining a reputation of integrity are not only vital to customer relations, but to the success and personal fulfillment of the entrepreneur as a whole. Knowing that entrepreneurs generally have a larger stake in the success and failure of ethical decisions than financial gain or loss, the next step would be to find out what the major ethical dilemmas facing American business owners are.

In the paper, "Integrity and the Small Business: A Framework and Empirical Analysis" published in 2004, the Baylor researchers cited the most noted problems related to customers and competitors, with the second most common problem the way a company treats its employees, including decisions about layoffs and workplace discrimination, fairness in promotions. This is not surprising in the current economy, but ranked near the bottom of the list in the same survey nearly a decade earlier in 1995.

If these are the main day-to-day problems faced by entrepreneurs, how can these problems be solved? Integrity, which is defined as: to act with integrity is to consider the welfare of others with an uncompromising adherence to doing what is right.

Placing self-interest and personal financial gain ahead of the reasonable and legitimate interests of others is the root of ethical business dilemmas. Integrity and ethics aren't necessarily intertwined with religion, but is there a correlation to what drives the priorities of business owners?

"In this most recent research study, we found that businesspeople who take religious values most seriously score significantly higher than others in their ethical judgments on many vignettes," said Longenecker. "More specifically, respondents with conservative evangelical Christian beliefs scored significantly higher on even more of the vignettes."

A Christian worldview therefore, can be seen as supportive of ethical entrepreneurship. This research is consistent with the findings reported by Laura L. Nash, a Harvard professor, in her book Believers in Business. She interviewed approximately ninety evangelical Christian CEO's of entrepreneurial firms concerning the way they resolved ethical business issues. She reported that the majority of these entrepreneurs seriously attempted to integrate their faith commitments into their difficult business decisions.

Longenecker sees that the Hankamer School of Business, as a Christian institution, can advance these ideas not as religious sentiments, but present them in an appropriately scholarly way as a result of these findings.

"In fact, we might also apply Martin Luther's idea of God's calling as it applies to secular work, although this reflects our Christian heritage rather than modern research. In the light of Luther's teaching, entrepreneurship can be viewed as a noble calling. A calling that permits the entrepreneur and the entrepreneurial organization to serve God by the service they render to customers and the broader society," he continued.

In condensing years of the ethical attitudes of entrepreneurs study, it is evident entrepreneurs possess certain traits that drive them and set them apart. They have the same pressures of customer relationships, handling employees and making money as large corporations, but more of a stake in the outcomes. Their businesses aren't just what they do, but it's who they are.

"It is a mistake, I think, to conceive of entrepreneurship as merely a route to riches or as the way to make a million - or even a billion - dollars," says Longenecker. "I believe that we need to think more broadly of the entrepreneurial life and to encourage students to look ahead to the end of their entrepreneurial careers and the legacy they will leave behind. Will they take satisfaction in what they have built? Will they have preserved the important values and relationships in life?"

Longenecker, who was Baylor's original holder of the Harry and Hazel Chavanne Chair of Christian Ethics in Business, began his work in ethics and small business in the late 1980s, right before he retired in 1989. He is a highly-regarded expert in his field across the country and the world. So much so, that when he was given the Lifetime Achievement Award at the January 2005 National Conference of the United States Association for Small Business and Entrepreneurship held in Indian Wells, California, he was given a standing ovation for almost twenty minutes.