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An Ethics Lesson for Business Schools

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August 20, 2002, Section A, Page 19Buy Reprints
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When Joseph Wharton established the nation's first business school at the University of Pennsylvania in 1881, he made business law one of five basic business school disciplines. More than a century later, the study of business law has given way to the study of business ethics.

But business students do not need to study business ethics so much as they need to study business law. The scandals at Enron, WorldCom and ImClone did not occur because executives were not conversant with the difference between teleological and deontological approaches to resolving ethical questions. It goes without saying that these scandals involved serious ethical lapses. But they also involved serious violations of business laws. They occurred, at least in part, because their participants had an insufficient knowledge of, appreciation for and, yes, fear of the law. Business schools have played a role in this disaster.

Because today businesses face far more complicated rules and regulations than they did a century ago, the need for managers to have a realistic appreciation of the legal environment in which they operate is more important than ever. Some business schools still have strong business law programs, but most have spent much of the last three decades reducing, marginalizing and often eliminating their business law faculty as other disciplines grew in stature and popularity.

Consequently, in many business schools most students get their only look at the legal environment in which they will operate from faculty who view the law as an impediment. Finance professors have told me that insider trading rules and financial disclosure requirements simply undermine the efficiency of the markets. Accounting professors have explained to me that rules limiting the ability of accounting firms to provide internal auditing services to a client (and thereby prepare the same books that they later purport to audit independently) are pointless, because accountants would never risk their reputation by acting improperly. (Many accounting professors still believe this, but they are quieter in the aftermath of Enron.) No wonder many business professors impart to their students an impression that the law exists simply to be manipulated or evaded.

At several leading business schools, many of the faculty that teach business law no longer even have law degrees; economists and political scientists offer policy courses that focus on lobbying. Indeed, much finance and economics research and teaching is built on the silly (though occasionally useful) assumption that man is a rational maximizer of his own utilities -- and that these utilities can be measured financially. Not only is this unrealistic but, as the law professor Charles Pouncy has noted, it also encourages the view that any business strategy or activity that does not maximize monetary reward is suspect. This is the message that business schools tend to send -- and companies like Enron tend to follow.

With the help of well-intentioned donors, several business schools have established business ethics centers. Unfortunately, research shows that it is very difficult to teach ethical values to undergraduates, harder still to teach them to M.B.A. students and all but impossible to get through to those enrolled in executive M.B.A. courses. If they didn't get a sense of right and wrong from their families or their faith, it's unlikely a business school professor can instill one.

Ethics courses can help those who are truly well-intentioned find their way through ethical dilemmas where the law gives no clear answer. But even these people will founder when they go to work for companies that value results over honesty; at such firms, acting ethically is always difficult.

There has never been a more crucial time to emphasize law in a business curriculum. Too many people forget that capitalism was saved from its own excesses by the securities laws passed in the 1930's. Recent scholarship shows that countries with strong judicial systems administering rigorous financial laws enable companies to raise money more quickly and facilitate more efficient stock markets. Legitimate companies want laws that require accurate financial disclosure and rules that punish fraudulent firms.

Centers for the study of business ethics are necessary to represent the ideals to which we aspire. But most business students will always view business ethics as hortatory rather than mandatory, as extra credit rather than required.

Instead, business law professors should explain to students that legal requirements are not optional. Such requirements enable our free-enterprise system to function -- and disobedience carries a personal as well as a societal cost. My colleagues and I must tell this story more forcefully than we have in the past. But to do so we need a more prominent forum in the business schools of America.

A version of this article appears in print on  , Section A, Page 19 of the National edition with the headline: An Ethics Lesson for Business Schools. Order Reprints | Today’s Paper | Subscribe

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