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Business

Corporate Crises: A Philosophical Challenge

Alan Malachowski tries to unravel the philosophical mistakes which led to America’s recent boardroom catastrophes.

Picture a small, but successful, philosophy department in a relatively new, but nevertheless rather old-fashioned, university. The members of staff are conscientious and industrious. Their students are well taught, and by all accounts well satisfied with their various courses. The department therefore scores well in all external assessment exercises. Why is such a virtuous department especially vulnerable to commercial shenanigans? How is this ‘vulnerability’ connected to the recent revolution in corporate finance and the ongoing corporate crises? Alan Malachowski offers some provocative suggestions.

When historians and other such commentators look back on our time, they will no doubt find many things very puzzling about the prevailing intellectual culture. But, one characteristic is liable to stand out above all others: the blinkered manner in which it lumbered towards the future, apparently unable to see, let alone understand and assess, what was going on under its very nose. Here, I am referring to the incipient commercialisation of our whole way of life and the concomitant hegemony of big business values. We can leave aside the thorny issue as to whether this is, on balance, a good or bad thing. The prior concern is that the process is underway, has already drastically changed the social landscape and may well be irreversible. Those thinkers who have failed to recognise what has been going on are living in a fragile time warp that is likely to unravel sooner rather than later.

Philosophers in particular seem to have resolutely turned a blind eye as much of western society began to transform itself into a corporate theme park. It is tempting to blame this attitude of studied ignorance on the rarefied thinking and reading habits of analytic philosophers. Apart from sporadic contributions to the marginal field of practical ethics, analytic philosophy is written and practised as if the business community did not exist. Even social and political philosophy is produced on this basis, with no sustained treatment of the role of commercial organisations appearing in the work of major figures such as John Rawls (A Theory of Justice) and Robert Nozick (Anarchy, State and Utopia). However, analytic philosophers are not the only culprits, and in any case, despite their residual illusion of intellectual dominance, their influence is pretty limited. No, this gross lack of awareness is more broadly based. Search in vain to find any sustained engagement with the significance of commercial life within the somewhat more gregarious continental tradition, for example. We hear little above a dark murmuring about the descending technological ‘world view’ from Heidegger. The otherwise voluble Derrida is virtually silent. And even the prolific pen of Foucault, a veritable maestro of suspicion concerning other social matters, seems remarkably content to leave the corporate world completely untouched.

Aside from the natural temptation to blame philosophers themselves for burying their heads in the sand, there is the predictable lure of ‘conspiracy’ theories. For business has been highly effective in covering its tracks. There is no substantial history of the global use and abuse of power by businesspeople and their organisations. Corporate history is a largely self-written, fingerprint erasing and self-glorifying, project. Likewise, the practical consequences of business activities, though experienced everywhere by everyone, seem to be nowhere recorded in any systematic, verifiable fashion (try figuring out what amount of harm has been done over a particular period of time by a particular sector of business such as the pharmaceutical industry). We have instead only public relations platitudes and protective political dogma accompanied by the naïve estimations of obliging economists regarding improvements in ‘standards of living’, ‘shareholder value’ and ‘the quality of life’ on the one side and the overgeneralised rage of the anti-capitalists on the other. In the latter case, it is also as if business has carefully chosen its own opponents: those who do not really understand the theoretical basis of modern business and can thus be easily out-manoeuvred.

The beguiling notion of ‘conspiracy’ can be shelved on this occasion because ‘theoretical basis’ is the key phrase here. Most philosophers have probably bypassed the commercial realm because they high-mindedly believe business activity has little or no intellectual foundation, and certainly none of much philosophical interest. In doing so, however, they have overlooked one of the most dramatically important examples of how theory can influence behaviour. They have, in effect, sat out a revolution in thought that may turn out to be more morally momentous than any other in our history so far.

The ‘revolution’ occurred in the arcane world of finance theory. Kicking off on roughly the halfway mark of the twentieth century, it led at first to a flurry of activity in mergers and acquisitions that massively restructured the corporate world in the 70s and 80s, and then to a radically revised picture of the nature of business itself, a depiction within which the current crises became pretty much inevitable. All this needs some unpacking. It is probably best to start with the ‘new picture’ of business, and then work back to its theoretical genesis before highlighting the philosophical upshot.

Traditionally, business exists mainly to provide society with useful services and products. In order to make a reasonable profit it needs to focus on improving whatever it provides. Consumers reward companies that successfully carry out such improvements by buying their wares. If the company is a public one, its share price will also be linked directly to the initial focus on perceptible ‘improvements’. That is to say: the stock market will generally reward business when it is faithfully practised in this time-honoured sense. For private companies, the focus is reinforced by the prospect of being sold: only if it keeps its eye on the commercial ball will it fetch a proper price. Built into the traditional image is a corresponding set of values that govern how businesspeople view their role. They need, for instance, to have an abiding interest in (and hands on knowledge of) their particular line of business. Only a genuine concern to produce, say, better agricultural machinery will spark the consumer reward system into life and then sustain its interest. Furthermore, when businesspeople have their minds fixed on their job and its responsibilities rather than just its remuneration, this instills a degree of trust in the corresponding network of employees, suppliers and consumers. It automatically creates what is now, somewhat belatedly, recognised as an invaluable enabling commodity: ‘social capital’.

By contrast, an influential picture of business has emerged within which the primary goal is simply to make more and more money. In this scenario, the fixed points of the old way of doing business, such as a ‘focus on improving products/services’, an ‘abiding interest in a particular line of business’, ‘hands on knowledge’ and a ‘network of trust’ diminish in importance. They are viewed as disposable obstacles to faster and hence greater wealth creation, dusty relics of a bygone, amateurish age.

But, how can this be possible? How can the ‘fixed points’ be abandoned without creating a commercial vacuum, a vacuity that cannot possibly yield profits? This is where finance theory works its magic.

The recent revolution in corporate finance was primarily a revolution in ‘valuation’, more specifically in the way individual companies should be valued. On the old view, a business is worth whatever its financial statements suggest it is worth (this is known as the ‘accountancy model’). Thus, for example, a company’s annual report can be taken as a financial snapshot of its commercial health, of the state of play with regard to business fundamentals like material assets. There is, on this understanding, a ‘representational relationship’ between financial reports and commercial reality: the former portray the latter. In the new outlook, known as the ‘economic model’, this relationship is irrelevant (indeed, it is probably a causal consequence of the model being taken seriously that it will tend to break down as the current corporate crises indicate it has). According to the economic model, What matters most is how markets gauge the worth of companies.

The verdict of markets is paramount because they are so devilishly efficient in processing information. Suppose a company is likely to make an important technological breakthrough in the near future? The chances are that its share price will already reflect that prospect. Why? Because analysts and sophisticated investors will have figured out that this is liable to happen, and shares will have been purchased accordingly (and not just by those ‘in the know’: on the ‘leading steers’ account of the mechanism at work here, markets behave like intelligent procurers of information because other investors follow in the footsteps of those who are suitably informed). The piece of theory that captures this uncanny prescience of markets is called ‘The Efficient Market Hypothesis’ (EMH). At its strongest, the brand that the real purists favour, EMH renders markets clairvoyant: they know just about everything that can be known concerning companies. More sensibly, EMH is pitched as an empirical conjecture that on any particular occasion markets embody more finessed information about companies than any single individual or institution can muster.

Suppose the managerial members of the business community believe that markets are the best indicators of ‘value’ (or just think that the people who matter believe as much)? Then they will do all they can to ensure that their share price is as elevated as possible because that is the criterion by which they feel they will be judged in the high court of owners/investors. Throw in some further finance theory-influenced facts – e.g. (a) there is a rampant market for corporate control (predators who will jump in and do what needs to be done to push up the share price – euphemistically, in financespeak: “put resources to more efficient use” – if the incumbents are unwilling or unable to do so), (b) it is tax effective to take on debt, and (c) executives are routinely awarded large stock options – and you have a recipe for the kind of disasters we are witnessing. With the massive external and self-interested (remember the stock options!) pressure to keep the share price flying high, those running our companies are naturally going to look for precisely the kind of short cuts that have landed them in the trouble they are in right now. Patient development of products and services in the womb of commercial trust will always be trumped by any quick deal that promises to bolster current share price. The Enron case provides a perfect example of such how such deals have actually been conjured up out of mercantile thin air.

Unless you have been doing a lot of reading between the lines, I guess you will be thinking that so far all this adds up to a big philosophical “So What?” Let me try, then, to briefly spell things out.

On the face of things, finance theory is a purely technical concern that should be of no philosophical importance. However, the part that it has played in generating the moral ethos that precipitated the present corporate crises ought not to go philosophically unnoticed. In the first place, philosophers need to examine what this ‘ethos’ involves and how it functions. They have to construct some sort of working ‘genealogy’ of corporate life if they want to stay in touch with the world around them. Of course, a common worry will be that philosophers come to this task with no special competence. Their methods were not designed for such an undertaking, and their history apparently leaves them stranded in the time warp we mentioned at the start. But this need not deter them. The corporate crises are part of a huge social mess that everyone should try to help clear up.

Furthermore, if we take analytic school as our example, a closer look at its customary philosophical tool kit reveals some intriguing possibilities. Financial theory is somewhat isolated from criticism because it supposedly deals in scientific verities or ‘theoretical necessities’. But, philosophy can take advantage of a more holistic model of truth, that developed by Willard Quine, and use it to make pragmatic inroads where other objections may fail. For in this model, to put it simply, any claim can be revised if the overall practical payoff is sufficiently attractive. Finance theory then enjoys no automatic immunity just because of its theoretical status. Philosophy also has to hand some potent ideas on theory-confirmation by courtesy of thinkers like Popper. These can be brought into play to challenge some of the more blatantly circular talk about markets. If markets are as perceptive as EMH contends, it is mysterious how the current crises ever got off the ground: the markets should have seen them coming. Moreover, the widespread response of the business community, typified in the complacent columns of The Wall Street Journal, is equally fishy. It is argued that the crises are still further evidence of the wonder of markets, a sign that they are correcting themselves and that any interference with this process by ‘do-gooders’ will only make matters worse. Nothing phases the true fans of markets. But, in this light, EMH looks like it cannot be falsified and is hence empirically trivial. There is also plenty of scope for the kind of ‘conceptual clarification’ that many philosophers still favour. Finance theory sits at the centre of a powerful constellation of political creed (usually right wing) and business dogma (that usually rationalises what otherwise appears to be unethical behaviour) wherein, for example, consumer choice and political choice are conflated. There is plenty of work for philosophers to do in challenging such anomalies.

All this is, of course, standard stuff. If philosophers really want to escape their time warp, they are going to have to do something more ambitious. The ‘restructuring’ we referred to earlier caused grave social harm, but those who participate in the constellation of ideas that shelters finance theory have found fresh ways of talking about wealth creation in which that kind of ‘harm’ does not figure. In their domain, things like unemployment, the devastation of small communities, gross disparities in income and personal assets, the abandonment of customs and traditions do not even show up on the map of human suffering. In this world, where no known moral compass can make it any easier to plot an honourable path, new values are being forged. It thus offers a great challenge to philosophers. And, not just to their forensic skills. They will have to risk getting their hands dirty digging into the details of corporate dealings. Business ethics has to be up-graded so that for new generations of philosophy students questions like “Do companies have any obligations to society over and above their duty to obey the law?” become as interesting and important as “Does justified true belief constitute knowledge?” Literature, film and journalism can be called upon to create a ‘phenomenology of business values’ within the required ‘genealogy’. But, above all, philosophers will have to exert the full powers of their imagination to fathom the dark ways of modern commerce, to break the all-encompassing spell of financespeak. Only a dramatic revisioning of human possibilities will suffice. If ever there was a perfect time for a monumental example of what the American philosopher Richard Rorty calls ‘redescription’, this is it.

But, what about the special vulnerability of the ‘virtuous philosophy department’ described at the start of this article? I will give my explanation briefly in Issue 41. Meanwhile, a free copy of my recent book Richard Rorty to the person who, in less than 250 words, comes closest to what I had in mind. (Emails only please by 28th February 2003 to: amalachowski@ftnetwork.com)

Alan Malachowski is Honorary Lecturer in Philosophy at the University of East Anglia and also teaches business ethics there at The School of Management. Last year he published a four-volume collection called Business Ethics: Critical Perspectives (Routledge).