By Joseph L. Badaracco
WHAT’S the right way to make tough business decisions? We all know the standard answer: Obey the law and do whatever maximizes profits or produces the greatest shareholder value. For gray-area decisions, however, the standard answer isn’t the right one.
Gray areas are situations with high uncertainty and significant stakes for employees or the larger community. What if your business unit is considering layoffs? Do you simply maximize profit, as if you were making a decision about scrapping machinery, or do you consider the human impact?
Perhaps managers have no choice. Aren’t managers obligated by law to maximize returns to shareholders? The answer is no. American corporate law says that the duty of managers is to serve the interests of the shareholders and the corporation. That is a very broad mandate, and the law gives managers a good deal of flexibility for pursuing it.
A recent exchange between Tim Cook, the CEO of Apple, and an activist shareholder dramatized this legal reality. The shareholder asked Cook about the company’s renewable-energy efforts and told him that Apple should undertake them only if they were profitable.
In a rare display of anger, Cook replied that Apple did many things because they were right and just: “When we work on making our devices accessible by the blind, I don’t consider the bloody ROI [return on investment].” Then he added, “If you want me to do things only for ROI reasons, you should get out of this stock.”
Cook was speaking as a true capitalist. He said what Apple would and wouldn’t do to earn profits and succeed strategically. Investors could then decide whether to buy the shares. In competitive markets, strong profits can be critical to survival and success. But this important obligation—to earn strong returns—doesn’t override your fundamental duties as a human being.
Joseph L. Badaracco is a professor of business ethics at Harvard Business School.