Where Is The Line Between Ethical And Legal?

Just because a business practice is legal doesn’t mean it’s ethical. But does that mean it’s OK for CEOs to maximize profits by following perfectly legal business practices that cross the line into unethical waters? Some business executives would say, “yes.” Their stance is that a CEO’s main responsibility is to maximize profits and shareholder value within legal parameters—even if that means having low ethical standards. Others would argue that CEOs have a social responsibility to conduct business in an ethical manner even if that means securing a slightly lower return on investment. Who’s right? Does it depend on the industry?

One of the most controversial business decisions in recent years was when Martin Shkreli, former CEO of Turing Pharmaceuticals, raised the price of the drug Daraprim by 5,000%. This move increased the price from $13.50 per pill to $750 per pill overnight. Daraprim is used to treat toxoplasmosis, which can affect pregnant women, people with HIV and others with weakened immune systems. Shkreli’s argument was that by raising the price of the drug, Turing would be able to put money into developing better treatments for toxoplasmosis. The FDA approved Daraprim in 1953.

Ezekiel J Emanuel, MD, PhD, chair of the department of medical ethics and health policy for the University of Pennsylvania, agrees that what Shkreli did was no different than what other pharmaceutical companies have done for years. For example, Valeant Pharmaceuticals International Inc. acquired cardiac drugs Isuprel and Nitropress and quickly raised the prices by 525% and 212%, respectively. Shkreli raising the price of Daraprim by 5,000% may be considered more brash. It was also perfectly legal. And unethical, says Emanuel. Was it wrong, though?

The public certainly thought it was wrong. Shkreli, who was arrested for securities fraud in December 2015 from his tenure at Retrophin, another biopharmaceutical company, was immediately vilified. Even former Valeant CEO Michael Pearson had a change of heart regarding his own business decisions. He recently testified to a Senate committee hearing that he regretted pursuing acquisitions where the rationale for the deal rested mostly on increasing the prices of the medicines. But Shkreli stands by his decision. During a healthcare summit hosted by Forbes, Shkreli was asked what he’d do differently if he could go back in time prior to his decision to raise the price of the drug. He replied that he should have raised prices higher. “I could have raised it higher and made more profits for our shareholders. Which is my primary duty."

Not everyone agrees that a CEO’s primary responsibility is to maximize profits for shareholders. Emanuel says that leadership is being responsible in pricing and having a model that isn’t about maximizing returns. “It is the question of what is a responsible price where we can make a reasonable return. Let’s be fair. Lots of other industries don’t make a 17% to 50% return. Other companies make a 7% to 10% return, and it is perfectly reasonable,” he says. Emanuel also clarifies that shareholders are more than stockholders. Businesses should look at what does the price do for employees, the patients that you are treating and the society in which you operate. These groups are all the shareholders not just investors, he says.

Kenneth L. Davis, MD, president and CEO of the Mount Sinai Health System , says the issue of drug prices boils down to a values issue of management that has to weigh the widespread availability and profitability of a drug. “I am well aware of how much drug companies have to spend on failed drugs before they have one that is a success. I am more than willing to say that that has to be accounted for when one contemplates a fair return on investment,” he says. “But that fair return on investment has to keep in mind that we are still in a business of healthcare and curing disease, which can’t be restricted to only some people who can afford it. There is a social responsibility there too.”

Should the healthcare industry have a different set of ethical standards to follow than other industries because lives are at stake? Or should ethics drive business decisions more than profitability regardless of the industry? Experts contend that businesses with high ethical standards reap more long-term benefits because they will have a better brand image, greater customer loyalty and increased productivity from a loyal staff. Businesses with low ethical standards may yield short-term financial gains but also risk damaging their reputation long term. Just look at what happened to Valeant Pharmaceuticals , which is trading today at $24.56, down 91% from where it was this time last year.

Ultimately, determining how much ethics versus profitability plays into your decision-making may come down your company’s values and mission statement. CEOs should conduct business in a manner that reflects the culture of the organization whether that means focusing more on profits than ethics or vice versa. To ensure that alignment, businesses should establish a code of ethics. This document should address industry trends and the company’s goals for social responsibility. Policies should:

• Define what the code ethics is, why it matters and how it fits into the organization’s culture.

• Align with the organization’s core values.

• Use clear, plain language that employees can understand. No legalese.

• Offer real-life examples to help employees make decisions in all levels of the organization.

• Explain what are the consequences for breaking the company’s code of ethics.

• Provide a system for employees to ask questions or report any code violations.

• Be reviewed and updated annually.

CEOs do have a responsibility to keep businesses profitable. Their success often depends on profit-and-loss statements. But some businesses also value having high ethical standards. There is no doubt that CEOs often face difficult decisions that may negatively impact employees or customers. That doesn’t mean they are the wrong decisions. CEOs should keep their company’s ethical barometer close at hand and remember that just because something is legal doesn’t always mean it’s right. On the flip side, just because a decision may be viewed as ruthless, doesn’t mean it’s the wrong choice for the long-term viability of the organization. When it comes to the game of business, my rule is to know the rules and then play the game at the very edge.