Ethical Behavior & Profitability

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

In a capitalistic economy, unethical business practices can bring substantial short-term gains. This lesson discusses why ethical business practices are more profitable in the long run even if they seemingly reduce profitability in the short term.

Are Ethical Business Practices Cost-Effective?

An Epic Ethics Failure

In October 2016, one of the nation's largest for-profit technical schools, ITT Technical Institute, abruptly ceased operations. Students and employees arrived at its campuses to find the doors locked with little information about their future. More than 35,000 students were left without the ability to complete their degree, and many of them were unable to transfer their credits to other schools. Despite the sudden closure, ITT and its accrediting body were well-aware that disaster loomed on the horizon. In what was undoubtedly one of the largest ethical failures since the fall of Enron. Both organizations had ample opportunity to correct the issues that led to ITT's demise. Instead, the unethical business practices went unchecked and the US Department of Education ultimately revoked ITT's eligibility to participate in federal student loan programs.

An ITT Technical Institute Campus
ITT Technical Institute

The Sudden Closure Fallacy

One might assume (correctly) that the Department of Education would not take a decision to idle 35,000 students lightly, and indeed they did not. Even though ITT's problems included knowingly reporting fraudulent statistics, the Department of Education gave them an opportunity to cease the practice and return to good standing. The closure order came only after ITT failed to demonstrate adequate corrections to the problem. Consequently, it is safe to conclude that the 'abrupt' termination of thousands of employees, and the dismissal of tens of thousands of students was not actually abrupt at all. Thus, in addition to the unethical decisions to publish forged or fraudulent numbers, executives of the organization also acted unethically when they were aware of the impending danger but chose not to modify their unethical behavior or inform staff and employees that the business was facing serious threats to its ongoing operation.

The executives and board members of ITT had a fiduciary duty to stop the illegal statistical manipulation, but they chose not to do so. A fiduciary duty is a duty of an individual or corporation to apply the highest standard of care.

Paying the Piper

Sadly, in a list of those who suffered because of ITT's unethical behavior, the executives making the unscrupulous decisions are most certainly at the bottom of the list. Even a cursory glance reveals a long list of individuals and entities who paid a high price for its corrupt behavior. Some of these affected parties included:

  1. More than 35,000 students whose massive investment of time and money was wasted.
  2. Thousands of staff and faculty who were abruptly laid off with minimal assistance to make the transition to a new employer.
  3. Hundreds of vendors and their employees whose livelihoods were in jeopardy after tens of millions of dollars owed to them were discharged under ITT's bankruptcy.

Even though these affected parties number in the tens of thousands, the individuals most unjustly impacted by the unethical decisions are American taxpayers. Federal law requires the forgiveness of student loans made to students whose education is halted by a school closure. Consequently, the American taxpayer will likely fund the forgiveness of more than $500 million in student loan debt. Local communities and taxpayers suffer as well from the loss of tax revenue associated with property, income, and sales taxes that had previously been paid by ITT. Taxpayers will foot yet another bill in the millions of dollars for court costs and attorney's fees related to ITT's chapter 7 bankruptcy proceedings. Finally, taxpayers will subsidize the unethical decisions even further by footing the bill for millions of dollars in unemployment payments that will go to the thousands of employees involuntarily and abruptly separated from their employment at ITT.

Making and Losing Money for Ethical Behavior

Acting Unethically Pays, But Only in the Short Term

Although it may seem counterintuitive, business experts do not universally agree that ethical behavior is profitable. Before making such an assessment, it is important to differentiate between cost-effectiveness in the short term versus cost-effectiveness in the long term. Virtually all serious unethical business decisions are made when executives prioritize short-term profitability over long-term profitability. The problem of prioritizing short-term profitability over ethical behavior exists because unethical behavior often does indeed result in a veritable windfall in the short term.

Is the System Broken?

As if strong short-term financial gain was not enough, the problem is compounded further by the fact that the long-term price of unethical behavior is often borne by others rather than the person or business making the unethical decision. In the case of ITT Tech, tens of thousands of individuals and businesses suffered more than the ITT executives.

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