Insight
No. 5
 

The Honorable Merchant ― A  Role Model for Today

Manfred Hoefle, Armin Sorg

After the aberrations of the 'new economy', Horst Albach, the German doyen of Business Studies, called for a return to the ethos of the Honorable Merchant (the first person to do so for over half-a-century) while condemning the economics of greed. Since then, we have seen a renaissance of this traditional role model, something also noted by prominent business leaders and entrepreneurs such as Berthold Leibinger, Franz Fehrenbach, Jürgen Hambrecht, Peter von Siemens and Reinhard Mohn. Private initiatives have been established in collaboration with the Humboldt University of Berlin.


A long history: forgotten but now revived

The tradition of the Honorable Merchant goes back to the Middle Ages. The virtues of honesty, justice, prudence, moderation and foresight were taught as early the 12th century in the cities of northern Italy. A commercial ethos also emerged in the Hanse League of merchant guilds and market towns: a moral code, pragmatically obeyed with strictly enforceable consequences. From then on, the Honorable Merchant became a part of civil society and co-evolved in harmony with the needs of contemporary societies: it remained valid for the relations of entrepreneurs with their workforce, for the internationalization of commerce, and for the (employed) company boss, as well as the integration of commerce in democratic society. However, the influence of capital markets and economic globalization has given rise to the anonymization of business relations and short-term advantage; commercial relations have now also become increasingly dominated by monetary incentives.

Recent cases of inappropriate behavior by leaders of reputable corporations remind us of the need for a system of ethical values. Widespread public outrage at the indecent and improper behavior of CEOs, such as Messrs. Schrempp, Middelhoff, Zumwinkel and Claassen in Germany, is a sign of how selfishness and moral degeneracy has spread within commerce, at the heart of society.


Honor – the key concept

The concept of honor goes far beyond the legal definition. Honor involves the inner commitment of a person (or group) to comprehensive honorable behavior. Honor is also effective without the threat of legal penalties or disapproval by others. While at first glance the concept of honor may appear to restrict individual freedom, it actually protects the individual against reckless and harmful behavior of others: it is both protector and peacemaker. Together with the concept of dishonor, shame and loss of face, it can create feelings of shame that reach deep into the soul.

Certain business circles believe they can get by without a personal code of behavior. Elaborate rules and agreements are considered sufficient. This perception is found especially in major public limited companies. And yet, as the often quoted cases of dishonesty at Enron clearly demonstrate, formal governance of the highest professional standard and the sponsoring of professorships of business ethics can sometimes be sufficient to project an image of honorable behavior that in no way reflects reality.


Ineffective formalisation

Business behavior can be codified by laws and regulations or by voluntary agreements. The concept of the Honorable Merchant assumes the commitment of those active in commercial life. Today this concept, first applied to the individual, is being extended to cover value-oriented corporate managers. And yet, at the same time, it is weakened by its formalisation into a printed codex that consists of mere recommendations. The recent past has brought an inflation of rules and regulations, in inverse proportion to actual moral behavior. The gap between public claims and real business operations is, in many cases, too wide to be overlooked. The effectiveness of this kind of moral code is, as experience shows, minimal. In other words, these codes are of little practical benefit, so we may as well dispense with them. What is decisive for moral behavior is an individual head of a company who acts as a role model; this has a much stronger influence on behavior patterns than do 'networks' or even communities of peers like professional associations.


Ethical business principles must be universal

The experience of internationally active 'merchants' over many generation is real evidence that what sustainable business relations must be built upon is a basic ethos: one that is not limited by a single nation or culture, but takes a form that varies to that it is suitable for and achievable by those involved. Honesty and integrity is ethical behavior that is always in demand, above all else. This top ranking is credible, even if we are only concerned that business relations function properly and reliably; one need only consider the opposite case of dishonest behavior and imagine its consequences. That business negotiations and relations can develop into informal partnerships is largely attributable to trustworthiness generated in this manner. However, if business relations are one-time, short-term or promiscuous, then honesty and integrity will be spread thinly. Behavior will then tend toward opportunistic dealing and trading with the sole intention of gaining a short-term advantage.


The Honorable Merchant ― an evolving concept

The model of the Honorable Merchant is undergoing a transformation which is driven by deteriorating social relationships and ethical values; relationships which are increasingly impersonal and complex. This deterioration of business relations makes it necessary to expand the concept of the role model.

The most significant changes are compared in the following table:

Der Ehrbare Kaufmann im Wandel
Small, regional or national enterprises, Trade guilds, Professional associations Major international, global corporations, (global) professional associations
Personal relationships Sometimes anonymous, complex markets
Family enterprises,
Personally liable partners,
Main shareholders, Trusts
Major publicly owned corporations,
Large state-owned companies
Homogenous groups (e.g. the Hanse) Heterogenous groups (e.g. business schools, international careers)
Informal, Comments on behavior,
Rules of behavior
Formal, detailed supervision, Compliance, controlling and reporting
Long-term, Cross-generation Short and medium-term
Ownership, Enterprises Associations, Lobbying
Unlimited liability of ownership,
Penalized by social ostracism
No or limited liability Judicial prosecution, Covered by D&O,
Opportunities for avoidance
Problem-solving (in the
Schumpeterian sense),
Embedded in the real economy
Profit-oriented mainly via transactions in the nominal economy, Services for the real economy


The Honorable Merchant in today's society ― described at three different levels.


First, at the personal level

An honest and therefore honorable 'merchant' (businessman or businesswoman) is someone who has their own ethical compass, which they can employ whatever the business climate. It can be applied in both the private sphere as well as the vocational and business world. It should be considered a moral code of integrity at the personal level. An appropriate education, training and socialization before the start of vocational life will help to cultivate this moral asset. One should be aware that trying to be an Honorable Merchant places high demands: it is an ideal type. It is not something you can acquire: it is something to be constantly strived for; it is a personal quest.


Second, at the commercial level

In commercial relationships the "merchant" enters into a (business) relationship with employees and partners both as a private person as well as a representative of a firm, in which 'honorableness' (respectability) is of existential importance. At this level the rules, both written and unwritten, of business conduct come into play. Essentially this consists of a code of behavior which also represents the philosophy of the enterprise and the innermost convictions of the parties involved: this begins with the leaders of the firm who must, of course, practice what they preach: consequently, we may consider this to be a type of Commitment. It is crucial that all participants are clearly aware that behavioral integrity also functions as a guarantor of long-term commercial success. This is easier to appreciate and achieve in long-term business relations than in one-time, short-term business transactions. Nevertheless, the truth of this proposition in validated and confirmed by the real-world, long-time experience of numerous internationally active German industrial enterprises.

 

Third, at the level of society and state

At this level, statutory rules apply, which are agreed upon in a democratic process. In a centrally planned economy, there is no place for such democratic processes, and neither is there in so-called 'predatory capitalism'. Nevertheless, supplementary and subsidiary rules can always be agreed through voluntary commitment by companies and within sectors (collective action, arbitration bodies). However, as a rule statutory regulations still dominate. In fact, these regulations are now reaching the limits of what is allowed and acceptable. These all-embracing regulatory systems can be summed up in one word: Compliance. In Compliance what counts is merely formal consistency, the motive or degree of voluntariness is irrelevant. Nevertheless, the guiding principle should be that as many regulatory aspects as possible be handled at subsidiary levels and voluntarily. In short, laws and regulations should be introduced only when they are absolutely necessary.


The Honorable Merchant is essential to society

The special role of the Honorable Merchant in day-to-day commercial activity is not restricted to special cases or instances. Due to his/her ethical anchoring and degree of moral commitment both toward business partners as well as the community and the state of which he/she is a citizen, the Honorable Merchant makes a valuable and telling contribution to civic life: he/she is the basis for and generator of trust between people, and the source of the ethical capital which ensures the proper functioning of market economies, as well as the cohesion of society as a whole. The crucial importance of such day-to-day ethics becomes abundantly clear whenever it is absent. What we need today are less rules and laws and those that we have should be simpler in their execution. The ethical aspect of the Honorable Merchant also has another real but often neglected real-world value. In practice ethical behavior reduces transaction costs (keyword: the gentleman's agreement) and makes commercial activity much simpler and efficient, as general confidence in enterprises and entrepreneurs grows. Practical experience teaches us that a trustworthy society and not a regime of rules and regulations is the more reliable, effective solution for human commerce.

 

Rebuilding the ethos of the Honorable Merchant

It sounds easy enough: the Honorable Merchant should receive a moral education, during childhood and at school, supported by community, churches, peers, associations, clubs and societies. There is a German saying, 'What you don't learn as a child, you never learn as a grown-up'. Your early education and the company you keep are crucial. The internalization of attitudes such as "One doesn't do that, that's wrong!" is a tender root that requires continual cultivation. Vocational training plays a supplementary and preparatory role. Courses on business ethics are transient phases of temporary consciousness raising and reflection: the impact of such teaching is short-term in the absence of a thorough practical grounding in what honorable behavior actually is: in particular when, in professional life, incentives pull people in the opposite direction and ethical relativism prevails. The institutionalization of ethics at colleges and universities is a laudable and serious attempt to correct this tendency, but in many cases it is merely an expensive and ineffective ersatz solution.

Also, the ritual at US business schools, in response to the finance and economic crisis, of making public pledges to behave ethically for the rest of one's life, seems like a spontaneous gesture rather than an expression of internalized ethical behavior; especially since these universities do not come out and openly criticize the unethical behavior of their business alumni. The opportunity provided of excluding dishonorable managers from all-important alumni associations, which are crucial career and social institutions in the USA, has not been grasped often enough, so far.

If the ideal of the Honorable Merchant is to be revived and practised, then several new routes must be taken. The first route calls for appropriate penalties for anybody found guilty of dishonorable business practice.


Do not underestimate social ostracism

One highly effective penalty, but one used less and less today, is without doubt social ostracism. Earlier in small communities the threat of exclusion from commercial life due to gross misbehavior was a highly effective disciplinary measure. There was little need for judicial courts or media interest. This social mechanism was founded upon transparent communities, in which certain behavior was simply not tolerated. In a relatively closed society, like Japan, with rituals of humility such as symbolic bowing by the 'sinner', a voluntary admission of guilt is a precondition for continuing acceptance or readmission to the community or general society. Unlike these communities, and despite grave infringements against common decency and ethical standards, in Germany we find that managerists often feel under no obligation to publicly apologize for malpractice, they avoid the issue by moving their residence and base of operations abroad, preferably in some anonymous metropolis or pleasant holiday island.

Such failure to accept responsibility for improper behavior and deny responsibility for inappropriate actions exposes their real character: managerists are chronically unable to treat others with respect: although the latter is a fundamental ingredient for civilized human coexistence. In the minds of those who behave in this way everyone else must supposedly suffer from some kind of short-term collective amnesia: these managerists assume that their behavior will soon be completely forgotten.

Business associations have a duty not just to represent the interests of their members but also to exclude from their midst anyone who grossly violates ethical codes like that of the Honorable Merchant. Such penalties are still generally sorely missing. That is why figureheads of public life, such as heads of state, elder statesmen and stateswomen, and respected business leaders, should clearly and publicly condemn those who trespass against this commercial code of honor, should name and shame them, and not allow them to hide behind the cloak of anonymity provided by a company.


Malpractice made public

That the public disclosure of ill-treatment of employees and suppliers can act as a corrective is well known. The media, above all publicly financed media, should act as informal supervisory institutions. They should play an important role in exposing such behavior. This cleansing function must go beyond mere scandal and personal attacks. In Germany the exposure of inappropriate management practices at firms like Lidl and Schlecker show how significant changes can be effected in the behavior of faceless managers. Threats of a boycott or damaged public image are bad for business and therefore bad for the careers of those responsible, if they are held accountable. In general, the following should apply: gross malpractice should be deterred through the threat of social exclusion, and malpractice should be penalized at once; this is simpler and more effective than merely accepting verbal promises that someone will behave with honor.


More voluntary agreements

Agreements reached between interested parties with regard to impeccable business practice have proved to be highly effective. This is because such regulations have usually arisen voluntarily in response to previous inappropriate behavior and include simple sanctions to be imposed by third parties (arbitration courts). It is worth striving for numerous similar agreements at local, regional and international level: above all in sectors which are traditionally susceptible to malpractice: exemplary regulations have been introduced by the Bavarian construction industry, and internationally by collective action in the medical engineering sector within the context of Compliance. Such programs should be publicized more often, to encourage their imitation. The numerous new university schools of business ethics could combine their programs to promote and propagate best practice. In particular, auditing firms should, recognizing their own professional philosophy, adopt the moral values of the Honorable Merchant as their own, and pin them to their mast. Developing awareness across professional associations would be an invaluable and crucial starting point.


Fewer and simpler state regulation

The spread of regulation by numerous state agencies has proved to be less effective than hoped for.

When regulations are opaque and complicated, rules no longer act as a preventive but instead lead to a mere formal obedience, and the excusing of borderline cases. They also give rise to endless legal conflict, where short-term correctives would be more appropriate. An exemplary case is the pollution of the Hudson River by General Electric (GE) over 20 years ago: this resulted in a costly legal dispute that is still ongoing.

The comprehensive regulations that have emerged together with Compliance in various corporations represent an unsatisfactory method for preventing or penalizing inappropriate behavior; Compliance rules are too complex and engender a culture of distrust and bureacratization. The Commitment of employees, that is indispensable for the success of any business, is undermined. The US variant of Compliance has its roots in a specifically Anglo-American legal and regulatory tradition that is of limited benefit, for example, in continental Europe. That is why, at both company and sector level, the practical application of simple and more transparent rules with stricter observance is necessary. This will have a highly deterrent effect. While evidence of possessing a comprehensive rulebook may have a certain documentary and exculpatory value, the benefit of this type of Compliance for everyday business purposes is, in most cases, highly questionable.


Bethinking human scale

In a growth-addicted economy partly driven by greed and in a society dominated by consumerism – two key aspects of the zeitgeist over the past 20 years (as exemplified by the USA, China and other countries) – it is more than ever essential, no matter how difficult the task, to reconsider and revive the ethical standards of the Honorable Merchant. Commercial relations, in the wake of and in reaction to the enormous changes brought by globalization, will gradually stabilize. Due to a greater awareness of risks and environmental aspects there will be greater emphasis on good neighborly relations in the different economic areas. This will present opportunities for a reorientation. It will become easier to satisfy the universal desire of humankind to be treated decently, honestly and with respect. The Honorable Merchant as an ethical code must assume novel characteristics if it is to gain renewed and wider acceptance. The integrity of commerce should become a foundation stone for human relationships based on trust. Therefore, the role model of the Honorable Merchant is, undoubtedly, more than ever in urgent need of a comprehensive makeover.


Manfred Hoefle, Armin Sorg, 8 April 2011

 

Literature

Horst Albach: Zurück zum ehrbaren Kaufmann – Zur Ökonomie der Habgier, contribution to the WZB Forum, 28 January 2003.
Manfred Hoefle, Eckard v. Leesen: Gute Corporate Governance, (Thinkpiece, Managerism), self-publishing, Munich, Germany, 2008.
Karl Homann: Mehr Verordnung oder mehr Verantwortung?, Interview in PWC: Das Magazin für  Vorausdenker, Special Issue October, 2009, p. 13.
Berthold Leibinger: Der ehrbare Kaufmann – Auslaufmodell oder Leitbild in einer globalen Welt, Speech at the Gala Centenary of the Foundation of the Handelshochschule Berlin – now School of Economic Science, Humboldt University of Berlin, 27 October 2006.
Armin Sorg: Compliance is Bureacracy ― American Style, see Compliance
Joachin Schwalbach: Der Ehrbare Kaufmann: Modernes Leitbild für Unternehmen?, Zeitschrift für Betriebswirtschaft, Special Issue 1/2007, published by Gabler, Wiesbaden, Germany.
Information portal: Der Ehrbare Kaufmann www.der-ehrbare-kaufmann.de (Humboldt University Berlin, Institute for Management.)