Fraud is not a good business strategy

I'd like to be able to file that under 'duh', but unfortunately too many people believe otherwise. Given the amount of fraud and crime revealed after the 90s dotcom bubble, many folk have come to think that the way to stop it is to make business schools "more responsible" and make ethics integral to the courses of instruction. Over at Mises.org, James Sheehan has some words to say on that point:

The survey clearly assumes that ethics can be taught in a business school setting. But this assumption is highly dubious. A business school course in ethics is hardly going to transform an unethical person into an ethical one. An MBA student's ethical foundation is formed long before reaching graduate school, where the average age is about twenty-seven. If a twenty-seven year old is inclined toward morally repugnant behavior toward others, that individual is probably destined to attempt some kind of crime regardless of what a business professor might say. Some of the executives accused of corporate crime, like Martha Stewart, did not even attend business school.

The survey does not specify what business school priorities lead an otherwise ethical person to commit crimes on the job. Reading between the lines, the innuendo seems to be that profit maximization, or seeking out the highest return on investment for shareholders, is what causes managers to consider lying, cheating or stealing in the workplace. This, after all, is the story line of countless Hollywood movies in which businessmen are cast as villains.

The problem with this thesis is that profit maximization is not furthered by committing fraud. The shareholders of companies like Adelphia Communications, Tyco and Worldcom did not see their returns maximized by management criminality. If anything, economic profits were diminished by inept and/or corrupt managers. The managers who defrauded shareholders were clearly trying to enrich themselves at the expense of shareholders. The desire for profit maximization helped minimize the damage as the most profit sensitive shareholders detected warning signs early and sold their shares.

Unethical people don't get (or, rather, are unlikely to get) ethics from their MBA classes. And, even if you grant that individual "profit maximization" on the part of the corporate criminals was responsible for their fraud, it is likewise true that the same impulse to profit maximization caught the criminals in the end (and, I note, well in advance of any SEC investigation, fine, or intervention...). So, at worst, its a self-correcting mechanism. But I don't grant that the impulse to defraud has anything to do with profit maximization, since honesty in business goes much farther than trying to rip people off.

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