Could Management Embrace a Code?

Most successful codes—such as the ancient Hippocratic oath, for doctors—establish the ideals and social purposes that members of the profession embrace. As the sociologist Robert K. Merton has argued, such codes have enormous influence because they provide guidelines for how an occupant of a role ought to behave. They can trigger strong positive emotions such as pride (when one acts in a manner that exemplifies the code) and equally strong negative emotions such as guilt or shame (when one acts in ways that transgress the code). The influence of such emotions in shaping behavior can be as significant as the expected material or reputational consequences of a professional’s behavior.

Codes and their supporting institutions also help define an implicit social contract among the members of the profession. By establishing a standard for inclusion, they create and sustain a feeling of community and mutual obligation that members have toward each other and toward the profession. These bonds shape the social capital of a profession—capital that builds trust and greatly reduces transaction costs among the members of the profession and between the profession and society.

Codes create and sustain a feeling of community and mutual obligation that members have toward each other and toward the profession.

There’s no mystery to the process of establishing a professional code for management: Articulate the code (as so many other professions have done); familiarize students with it during their formal management education; require students to embrace the code as part of their professional license or certificate to practice; and create peer review bodies to monitor adherence, establish protocols for due process to review infractions, and administer sanctions as necessary.

The challenge in writing a code lies in forging a broad enough consensus on the proper aims and social purpose of management and the norms for pursuing these aims. There appear to be two deeply divided schools of thought on this topic. One school, anchored by economists like Milton Friedman, argues that management’s aim should simply and exclusively be to maximize shareholder wealth using means consistent with prevailing laws and customs. Let markets and the state take care of the rest. The other school argues that the corporation should properly be thought of, as organizational theorist Chester Barnard wrote long ago, as a social institution that enables individuals to come together to create value they could not create individually. In this view, the proper purpose of management is to judiciously balance the legitimate, potentially competing claims of all stakeholders whose joint effort creates value.

It’s clear that the extreme approaches won’t work. The flaws in a dogmatic adherence to the doctrine of “maximize shareholder value to the extent permitted by law” have become very apparent. On the other hand, the stakeholder approach has drawbacks as well. Stakeholder interests can diverge sharply, and managers who attempt to keep everyone happy when there is no sensible compromise can do more damage than those who put the shareholder first. Some Japanese firms are textbook cases of this problem. During the 1990s, for example, in their effort to avoid layoffs or even the collapse of insolvent banks, many Japanese banks refused to write off real estate loans that would never be paid back. Because of management’s unwillingness to make difficult short-term choices, an enormous amount of economic value was destroyed. To succeed, a management code will have to steer a middle course between these two extremes so that we lose neither the value-creating impetus of the shareholder concept nor the accountability inherent in the stakeholder approach.

Whatever the approach, without a collective commitment to a code that enshrines the duties and obligations of management as trustees of society’s economic resources, managers can no longer claim to be a positive social force, no matter how rich the financial rewards are for some or how many philanthropic foundations others construct. Without such a commitment, the public ceases to see managerial work as what the educator Howard Gardner describes as “good work.”