New ethic needed in business schools

Opinion by Professor Ken McPhail

The role that business plays in society is changing rapidly and yet most of the teaching at business schools, the breeding ground for our future leaders, is based on out-of-date thinking from the 60s and 70s. This is not good enough.

Nowhere is this change more apparent than in the area of human rights, a subject which receives little, if any, teaching in the classroom, but which is at the pointy end of the emergent role of business in modern society.

In 1970 the American economist Milton Friedman penned an article for The New York Times Magazine, titled ‘The Social Responsibility of Business is to Increase its Profits’. His view was that corporations should be left alone to focus solely on maximising shareholder profit, with government bearing the brunt of social responsibilities. This free market thinking forms the basis of much of the theory currently taught at business schools. However, the problem is that today’s world is very different, and far more complex, than these theories assume.

The power relationship between country states and multinational companies has shifted dramatically over the past 40 years. Today, revenues of the world’s largest multinationals exceed the gross domestic products of a host of countries. Multinationals have a global reach not enjoyed by countries, and private companies are increasingly delivering services that were once the domain of governments.

The UN has recognised this shift in power. In June 2011 it endorsed a series of Guiding Principles (GPs) on Business and Human Rights in an attempt to bring about a step change in corporate social responsibility (CSR). The GPs represent a vast shift in human rights thinking and global governance and see a new role for corporations as vehicles for realising rights and distributing justice. They are an attempt to move CSR beyond voluntary requirements that allow corporations to self-define what they will be responsible for, focusing instead on existing obligations in international law.

The GPs back three core values: governments are responsible for protecting citizens against human rights violations by corporations; corporations have a responsibility to respect human rights whether or not governments take their obligations seriously; and countries and companies need to make good any violations of individuals’ human rights.

The notion of citizenship has shifted away from national communities to an alternative view in which everyone has equal rights as part of a global community, with the implication that within some contexts, corporations might be better at realising rights than governments. The GPs point to a future where we could see mechanisms for protecting human rights, traditionally delivered by the state, being delivered by corporations. In the future corporate courts may represent the only redress for victims of human rights violations in countries where the government is weak.

Whether giving responsibility for human rights to corporations is a good or bad idea remains to be seen. Nonetheless this topic needs to be explained, debated and critiqued within business schools. If companies are responsible for the human rights of a global citizenry, the traditional relationship between business and the state is turned on its head. This renders the assumptions that underpin almost everything being taught by business schools redundant.

Despite this seismic shift taking place, most business students could not tell you the first thing about the GPs, which is evidence that the theories and practice being taught and researched in business schools are misaligned with the new role that is emerging for business in society. Ironically, this misalignment is in part a product of government research-rating exercises that encourage academics to stick with established views of corporations because they are much easier to get published.

Outside business schools, the idea that business has a responsibility for human rights is beginning to take hold. Research suggests that taking greater responsibility for human rights is gaining traction at board level across a wide range of sectors and continents. Having gained at least some broad consensus on the principle, interest is now shifting towards what it might actually mean in practice.

Business schools need to engage with the human rights agenda and with the new role for business in society. If they do not, then not only will they bear some of the blame for the failure to address business complicity in human rights abuses, they will look increasingly out of touch and will have failed in their social responsibility to innovate new business forms and regulatory mechanisms that address the moral and environmental challenges defining our times.

Business schools have an opportunity to lead the thinking in this brave new world, but to achieve this they will need to change what is taught in the classroom.

First published on Financial Times on 16 March 2014.

Professor Ken McPhail heads the Department of Accounting at the La Trobe Business School.