Companies, we are always being told, ought to behave ethically. What does that mean? We all have a rough idea of what constitutes ethical conduct in people. But a company is an abstraction. What ethical obligations does it have, and how do we know if it is fulfilling them?

This is not as impractical a question as it sounds. Corporate ethics is bedevilled by lack of definitions. The less we know what we mean, the more likely we are to be disappointed in our expectations.

There is a direct analogy here with the law. It is an established principle that a company is legally a separate entity from those who work for it or own it. So how do you hold a company liable for criminal acts?

In the UK, the answer has been that officers responsible for the company can be held to be its "controlling mind". If they act criminally in carrying out their duties, the company is criminally liable.

This is something of a dodge, and has proved tricky to enforce. There have, for instance, been attempts to charge companies with corporate manslaughter, after rail accidents and the like. All have failed save one, the case of a one-man leisure company responsible for a boating accident.

In other cases, it proved too complex to establish which people made up the controlling mind, and whether they themselves had acted criminally. The UK government is now considering a new offence of "corporate killing". Good luck to it.

As for the broader field of ethics, it helps to consider what the purpose of a company is in the first place. One school of thought, associated with Friedrich Hayek and Milton Friedman, says its sole purpose is to make a profit. That may sound bleak, but there is logic to it. Big companies are potentially very powerful. The more responsibilities we charge them with, the more power we risk giving them.

It sounds brutal, for instance, to say that the job of an army is to kill people as directed by the government. But the more you give the army other duties - upholding the law, for instance - the more risk you run of military dictatorship.

So far, so logical. But the Friedman view is not universally accepted. For a start, is it really the case that companies do nothing but maximise their profits?

Given the advance of investor capitalism in recent years, it is probably more true than it used to be. But it is equally plain that companies sometimes act on other motives: self-preservation, for instance, or self-aggrandisement.

As for the argument that companies are abstract entities, there is room for common sense. Norman Bowie, recently appointed professor of business ethics at the London Business School, puts it this way.

Suppose, he says, you receive a bill for oil from BP Amoco. The bill does not say it comes from the chief executive, but from the company. You pay it just the same.

"We speak in terms of corporate entities doing things all the time," Professor Bowie says. "By analogy, we can talk of a company being ethical."

In addition, common sense tells us that some companies do in fact behave ethically over decades, despite the fact that senior management have changed completely over the period. Other companies have a persistent tendency to transgress, for example by offering bribes.

Granted all that, what kinds of ethical behaviour can we legitimately expect from companies? Begin with ethical obligations as applied to people. These, Prof Bowie argues, fall under two broad headings.

The first is contractual. If you promise to pay me $50, you are ethically obliged to keep that promise.

The second is natural. If you see a toddler struggling in 2ft of water, and all it costs you to rescue it is wet shoes, almost everyone would argue you have a natural obligation to save it. If you pour petrol over a cat and set it alight, almost everyone would agree you are being cruel.

It is easy to think of companies observing contractual obligations. They enter contractual arrangements every day, not all of them legally enforceable. As the motto of the old London Stock Exchange had it, verbum meum pactum - my word is my bond. In commerce, trust is a valuable commodity.

What about natural obligations? It is much harder, as Prof Bowie concedes, to apply those to companies.

"But suppose a company lays people off just before Christmas, or just before they are entitled to a pension," he says. "Wouldn't it make sense to say that corporation is cruel? Some companies do act in that way, and beyond a certain point we can say that certain companies are crueller than others." Even if we grant all that, our difficulties are not over. If a person acts unethically - as opposed to illegally - society has plenty of sanctions, such as ostracism or public shaming.

Similarly, society can vent its disapproval of an unethical company by boycotting its goods or services. But whereas a person can suffer emotionally, the only damage that can be inflicted on a company is financial. This affects not the managers, who were guilty of the misconduct, but the shareholders, who were not.

This brings us back to the parallel with criminal justice. Let us grant that we are entitled to expect certain kinds of conduct from companies. If we are not to be disappointed, we must accept it is by no means clear how to hold them to it. [email protected] Copyright Financial Times Limited 1999. All Rights Reserved.

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Copyright (c) 1999 Financial Times Limited Received via NewsEDGE from NewsEdge Corporation: 08/11/99 21:10:07