Testifying recently at his trial for tweeting in 2018 that he had secured funding to take the electric car company Tesla private, Elon Musk suggested that people shouldn’t believe everything that he writes on the social network he now owns, telling the court that, “Just because I tweet something does not mean people believe it or will act accordingly.” Having already been fined by the Securities and Exchange Commission, the famous billionaire entrepreneur who also oversees SpaceX was being sued by shareholders who claim they lost billions when Tesla’s stock initially rose, then suddenly dropped when a deal failed to materialize. Although the jury ultimately did not impose liability on Musk for the tweet, questions about his business practices remain.
According to business ethics expert J.S. Nelson ’01, Musk’s trial is just the latest example of how he has drawn attention for violating much of the “social contract with employees, investors, suppliers, regulators, and other parts of his ecosystem.” To learn more, Harvard Law Today recently spoke with Nelson, currently a visiting researcher at Harvard Law’s Program on Negotiation and a professor at Villanova University’s Charles Widger School of Law. She is the author, with the late Lynn Stout, of the 2022 book, “Business Ethics: What Everyone Needs to Know.” Nelson argues that Musk is beginning to pay the price in other ways for questionable business practices that have eroded trust, and she advises that, while unethical conduct can bring short-term gains, running an ethical business “pays better over the long term in dividends that are sustainable.”
Harvard Law Today: What are business ethics and why do they matter?
J.S. Nelson: Business ethics are how we behave in the business context, and the impacts that our behavior have on the business world around us. Behaving ethically is important to our lives, to our well-being, to society, and to how we make money. It’s not true that making money in any way, shape, or form is good. Adam Smith recognized that, for capitalism to make a society prosperous, exchanges of goods and services need to make both parties better off. If I promise to give you something in exchange for shoes, and you give me the shoes, and I run away with them — if I violate the terms of that exchange so that we’re no longer both gaining from the exchange — we don’t have a socially beneficial exchange. We’re talking about maintaining the core of how our market system works. In addition, there are massive benefits to businesses and people who behave ethically, and significant penalties in the long term against people who do not.
“[T]here are massive benefits to businesses and people who behave ethically, and significant penalties in the long term against people who do not.”J.S. Nelson, a business ethics expert and visiting researcher at Harvard Law School’s Program on Negotiation.
HLT: Is Elon Musk reaping those ethical benefits?
Nelson: No, Elon Musk has violated a lot of the social contract, and its basis of trust, with employees, with investors, suppliers, regulators, and other parts of his ecosystem. He is starting to feel the repercussions of having destroyed the ethical assumptions that underlie many of those relationships.
The Latin word for “trust,” for example, is the basis of our word for credit. If you do not trust someone, you do not extend credit to them on the same terms. Elon Musk is trying to renegotiate $3 billion of the high-interest-rate loans that he took out to buy Twitter. Can you imagine what terms he’s going to be offered now? Would you trust him after he’s tried to back out of that very contract? In addition, because of Musk’s actions, an estimated 83% of Twitter’s workforce has left, and the company is being sued for non-payment of rent in multiple jurisdictions. Would you be eager to work for him at a discount, or to rent office space to him for less than at a very high premium?
Musk’s approach at Twitter has had terrible consequences for the company. From when he took over four months ago, merely 17% of Twitter’s workforce is still available. The company has lost 40% of its revenue, with advertisers jumping ship constantly. There is the very real possibility that it may have to file for bankruptcy soon.
The trust deficit that Musk’s behavior fosters spreads across his different ventures. Part of his defense in the Tesla trial was even to tell us that we shouldn’t trust him. Musk has now broken a record for personally losing the most money of anyone in history — $182 billion since November of 2021. He doesn’t seem like a star you’d hitch your wagon to.
By contrast, companies with a good ethical reputation can more easily hire employees, and they do so on better terms. Surveys show that, even during difficult economic times, 92% of employees would leave their current job to work for an employer with an excellent ethical reputation. There’s only so much high-caliber tech talent out there, and those people will have options, even amid layoffs. When Musk is hiring again, they will remember that he has a reputation for not treating his workforce well. Employees will be less likely to accept jobs at his companies, and more likely to demand monetary premiums to accept those jobs. Historically, employees are 77% less likely to take a job with an unethical company, and an unethical company has to offer employees a 57% pay premium for them to consider taking it.
“Surveys show that, even during difficult economic times, 92% of employees would leave their current job to work for an employer with an excellent ethical reputation.”
HLT: Is the amount of criticism that Elon Musk and his companies receive relative to others a form of observation bias because they’re simply in the limelight more often?
Nelson: I don’t think so. There are at least two reasons why this story and sector have gripped our attention. The first is that what’s going on at Tesla and Twitter, as two examples of Musk’s companies, is not the way that people at other companies are necessarily behaving or at the magnitude that other people are doing similar things. Elon Musk has already been fined over $20 million by the SEC for things that he’s tweeted and said to investors.
But there’s also something to be said about why we are hearing so much about unrest in the tech sector generally. Even ahead of the rest of the economy, that sector is going through massive layoffs, which are happening because its management seems so little committed to employees. The layoffs stand in stark contrast to these companies’ recent profits. Jeff Bezos of Amazon, for example, could give roughly $110,000 to every person who works for Amazon around the world, and still retain more money than he had before the pandemic. The profits that these companies have made, especially over the last two or three years, are astonishing. But workers have not felt appreciated for contributing to company profits. Instead, there are many stories about the brutal experience of working in an Amazon warehouse and elsewhere, with employees under constant pressure to meet unrealistic performance goals, often getting injured, and ultimately feeling like robots.
HLT: How does the tech industry ethos of ‘move fast and break things’ impact the way that CEOs think about business ethics?
Nelson: There are a lot of innovative companies that don’t move fast and break things through not treating their employees well. You don’t want to break your people.
If you make the terms of employment very mercenary, you receive mercenary behavior back. A reputation for bad ethics costs companies not only in salary, but in innovation, productivity, and turnover.
Treating your people as disposable is leading to the spread of “quiet-quitting,” and other such disengaged phenomena. Only about a third of U.S. employees still report that they are actively engaged with their work — with not many differences between remote and non-remote workers.
But treating people well matters, and good management increases employee engagement. Employees need to believe that the company will treat them well, and that they want to invest personally in its success. Engaged and motived employees spur innovation. Well-managed companies see that investment in their profitability numbers. Organizations with happy and engaged workers tend to be 22% more productive than organizations with lower satisfaction rates and less employee commitment.
“Treating your people as disposable is leading to the spread of “quiet-quitting,” and other such disengaged phenomena.”
HLT: What is the bigger impact of the ways Elon Musk and perhaps some other tech CEOs lead?
Nelson: Elon Musk is a product of the system that we have created. He has been rewarded in the short term for a lot of really bad behavior, which would have greater repercussions for anybody else. That distortion sends a signal to other people to behave the way that he has. But too many people behaving that way destabilizes our system.
We now realize that a purely transactional approach toward your people is dangerous for any business. Mercenary behavior and unethical conduct tend to cluster together. Ethical misconduct spreads and results in pervasive wrongdoing across organizations. Without an ethical environment, you can’t manage a company because you can trust your people to tell you the truth, and to give you the information that you need to run your organization. Poor management can also create misconduct through pushing people too hard. My research on managerial misuse of workplace surveillance systems shows what a threat, for example, they can be to business ethics and basic compliance.
It’s dangerous for us and for investors to trust companies that behave unethically. Not so long ago in the 2007–2008 financial crisis, we lost 45% of the world’s wealth through mortgage fraud, among other things. These bubbles have consequences. Lies and displays of callous behavior have consequences. We, as a society, should be smarter about not allowing unethical excesses and the damage that it causes. We should even more consciously reward behavior that is more profitable for all of us in the long term.
“Elon Musk is a product of the system that we have created. He has been rewarded in the short term for a lot of really bad behavior, which would have greater repercussions for anybody else.”
HLT: Last question. Is the system up to it? In the recent suit brought by shareholders, Elon Musk was not found liable. And so, while he’s paid lots of fines, it is hard not to wonder if the system is strong enough to get to the place you’re talking about, where we’re not rewarding the bad behavior, and we are rewarding good behavior? And if not, what needs to change?
Nelson: Engaging in business ethics and its benefits for our society cannot simply be a matter of law-enforcement cases or civil suits at the end of the line. By then, most of the damage has been done. At that point, you’re picking over the bodies, and trying to figure out how to compensate people as best you can for the harm that they allege they have already incurred. It’s particularly perverse for someone like Musk who lies to be able to say that he should escape liability because he lies so much. We need our culture and institutions to focus on encouraging and rewarding ethical behavior for market transactions to be mutually beneficial.
And we do see that. There is a positive story here. The data show that you shouldn’t be a jerk to get ahead. We, as human beings, tend to reward pro-social behavior over the long term, and in normal conditions, we shun those who engage in behavior that is damaging to the rest of us. Being ethical pays, and it pays better over the long term in dividends that are sustainable. It may be less flashy, but you’re more likely to live a good life, to provide for the people around you, to build something that you are proud of, including a company that is solid, that contributes the goods and services that people need, and that adds value.
It was Adam Smith’s great insight that the ethically bargained-for exchange would make both parties better off. An ethical exchange grows the pie for everyone. So, let’s get back to that. Let’s get back to Adam Smith and preserve the good things that capitalism can do when we keep healthy the core of business ethics upon which it depends.
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