Abstract

This paper examines the philosophical basis for the argument that there is a connection between ethical behavior and profitability. Both sides of this argument – that good ethics is good business and that bad ethics is bad business – are explored. The possibility of a moral floor above which ethical behavior is not rewarded is considered, and an economic experiment testing such a proposition is discussed. Johnson & Johnson suffers a potentially devastating blow when some cyanide-laced Tylenol capsules cause several deaths. Johnson & Johnson voluntarily pulls Tylenol off the shelf, to universal acclaim. When Tylenol is returned to the marketplace, its share of the over-the-counter painkiller market becomes greater than it was before the tragedy. Arthur Andersen, the venerable accounting firm, is caught in the web surrounding the downfall of Enron, Inc. As Enron’s various sins are discovered, it is found that Arthur Andersen auditors had signed off on flawed audits and had shredded documents to cover themselves. Andersen is prosecuted for, and convicted of, obstructing justice (although the conviction is later overturned). Today the firm barely exists and has no resemblance to the Big Five accounting giant of 1999. These stories seem to indicate that ethical (or unethical) behavior leads to positive (or negative) financial results. But the philosophical arguments underpinning such statements are seldom subjected to proper analysis. They are perhaps wishful thinking, or perhaps based on examples such as the above without considering other examples that may reinforce a contrary position. This paper will explore the philosophical arguments and empirical evidence regarding these statements and state some research questions for exploration in this area. In particular we will propose the possibility that a moral floor exists above which firms that engage in ethical activities will not reap rewards, but below which firms that engage in unethical activities will be punished by actors in the economic marketplace. We will discuss an economic experiment to determine if such actors indeed form a moral floor.