Skip to main content
Markkula Center for Applied Ethics

The Nexus of the Law and Ethics

Immoral or illegal, or both? Intrinsically evil or rendered wrong by statute? When contemplating how business leaders make decisions, perhaps it's not necessary to parse the ethics of a specific choice, or focus on what morally could or should be done.

The key to ethical decision making mostly lies in the determination of what is "smart," according to Joseph Grundfest, professor of law and business at the Stanford Law School and a nationally recognized expert on corporate governance.

It's relatively straightforward to ascertain whether something is legal. But ethical deliberations can get impractically messy, he said. Grundfest asserted that it's more productive for businesses to ask the question, "Is it smart?" rather than wade into a morass of moral questions. His lively comments sparked a brisk debate at the Nov. 14 Business and Organizational Ethics Partnership meeting sponsored by SCU's Markkula Center For Applied Ethics.

Grundfest, a former Securities and Exchange Commission member, and former staff member for the President's Council of Economic Advisors, posited that business leaders don't respond positively to ethics discussions when looking at what's best for their companies. Their motivation, once they dispatch the question of legality – that is, does any law preclude the contemplated course of action – is to behave in a way that is good, "smart," for business. Thus, a completely legal action – say a particular investment – may be utterly counterproductive when it comes to public appearances, negative publicity and the potential for investigation or litigation, he told the roomful of Bay Area business executives, and ethics and compliance offers.

Nor are ethics and smartness mutually exclusive concepts, he said. Most of the time, the ethical course of action will end up being the one that is good for the company's bottom line and reputation as well.

Grundfest's rationale raised the hackles of Kirk O. Hanson, director of the Markkula Center, who bemoaned the notion of underpinning decisions with the "smart" question while sidelining an up-front discussion of what is and is not ethical.

"We ethicists have to raise an objection," Hanson protested. As a business executive, to say something is not smart "from a self-interested, capitalist view, I am not going to be sensitive to all the ethical questions that I may face. I'm going to miss many more of these that you claim are not smart, because I'm not asking the ethical question" as it relates to all of the stakeholders involved in the decision, he said.

Further, a person's sensibilities on moral behavior are compromised, "by saying you don't ever have to think about ethics, but you just have to think about smartness," he said. "Unless you have a model in your head of what is ethical and what's not, you're never going to get to the smart question."

Grundfest insisted that "99 percent of the time" the smart question will result in an ethical decision. Several of the attendees applauded the philosophy as a business standard.

The problem Grundfest outlined was that "by framing the questions in terms of the word ethical, you hit so many emotional hot buttons." Addressing legality is not so complicated but people disagree on what's ethical, and such disagreements bog down decision making, he said, because "calling something ethical is a loaded term." By hewing to what's legal and what's smart for the company, the business leaders will do a better job than by saying, "We are going to have high standards of ethics at this company, as a practical matter," he concluded.

Grundfest noted the evolving nature of what constitutes ethical behavior as societal views shift over time and geography, with laws changing accordingly on such topics as same-sex marriage, abortion, and less controversial issues like divorce. Different states and communities, civil and religious, hold different views that complicate ethical discussions in business, and make the "smart" question even more useful, he added.

These different views are at the heart of the law and ethics challenge, he said. It is up to society to ascertain which behaviors are so reprehensible that they merit a ban or regulation, and in a democracy representing many points of view, sometimes those decisions simply have not been made.

Nov 1, 2012