Do Business Schools Have a Responsibility?

At a joint Society for Business Ethics and Academy of Management Social Issues in Management event, Olsson Center Senior Fellow and Ross School of Business Professor James P. Walsh gave a speech titled “What is Progress?” In it he compared advances in marathon running to advances in business education and asked the audience of professors to reflect on what they do.

James P. Walsh

James P. Walsh

During the question and answer period, Olsson Center Senior Fellow R. Edward Freeman, who is currently collaborating with Walsh, asked from the floor, “What is the role of business schools?”

Walsh said that professors have “a sacred trust in society” to prepare future business leaders and that teaching business requires responsibility. He implored those business professors to ask themselves what really matters and “how do you keep hope alive” amidst the daily barrage of ethics scandals. Echoing Freeman, Walsh said, “We need a counter narrative [about business] out there.”

While the theme of this year’s Academy of Management conference was “The Power of Words,” Walsh and Freeman are actively thinking about the power and future of business school education. They and many others like them realize their responsibility in developing the next generation of business leaders and how they can positively contribute to society.

If you are a student, practitioner, customer or other stakeholder, how are you changing the story about business in a positive direction?

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Stakeholder Responsibility

According to the article “Corporate and Stakeholder Responsibility: Making Business Ethics a Two-Way Conversation” by Jerry D. Goodstein and Andrew C. Wicks, while it is imperative that an emphasis remains on corporate responsibility, it is just as important that stakeholders take responsibility for the roles they play in both the successes and the failures of a company.

Jerry D. Goodstein and Andrew C. Wicks

Jerry D. Goodstein and Andrew C. Wicks

“Corporations have become the most powerful institutions on the planet, the engines of human welfare and progress, so it only makes sense that we talk about the responsibility that they (or their agents) have to other stakeholders. But, as important as it is, this has become a one-way conversation, one that makes business ethics focus primarily on corporate responsibility. It is time we make business ethics a two-way conversation and start putting greater emphasis on stakeholder responsibility and the role stakeholders such as employees play within the firm, and the role customers, investors, supplier, and public and nongovernmental organizations play, along with corporations, in fostering ethical business practices and business excellence.”

Furthermore, “the definition of responsibility that [they] are emphasizing in relation to stakeholder-firm and stakeholder-stakeholder relationships encompasses three different but complementary conceptions of stakeholder responsibility: fulfilling responsibilities as a function of reciprocity, fulfilling responsibilities as a function of interdependence, and fulfilling responsibilities as a function of accountability.” The responsibility as a function of reciprocity is described, “… to the extent that firms are responsible for fulfilling duties to stakeholders, stakeholders in turn are responsible for fulfilling duties to firms”, while responsibility as a function of interdependence “emphasizes the idea of people and organizations sharing a common fate and choosing to pledge things to each other so as to foster cooperation and enhance the welfare of society.” “Through making morally acceptable decisions and being held accountable for actions and impacts’” stakeholders fulfill the act of being responsible as a function of accountability.

In the article, Goodstein and Wicks “present five major arguments for why stakeholder responsibility matters and the possibilities illuminated by shining the business ethics spotlight on both firms and stakeholders.”

First, “in the same way that discussions of corporate responsibility have brought together the practices of business and ethics, stakeholder responsibility can give us another conceptual vehicle to connect business and ethics. With dual focus on corporate and stakeholder responsibility, ethics gets built into the very fabric of relationships between stakeholders and firms, and both firms and stakeholders are held accountable for their actions.”

“In terms of the second area [they] want to highlight, [Goodstein and Wicks] think stakeholder responsibility can help us think more critically and comprehensively about why organizational failure happens – especially business ethics disasters of the WorldCom, Enron, Parmalat, and Arthur Anderson variety. A focus on stakeholder responsibility reminds us that in thinking about why those breakdowns occur, we need to start by looking at the interactions among key stakeholders if we want to really understand what happened and why.” Goodstein and Wicks go on to call the “system of shared norms, understandings an practices, ‘regimes of responsibility’ – formal and informal ways that networks of individuals work together (both within and across organizations) to get things done and avoid ethical breakdowns.” “Taking the perspective of stakeholder responsibility pushes us to look at organizational failure as a chance to scrutinize stakeholders and regimes of responsibility that were in place at the time of moral failure, so that we can see where breakdowns occurred and how the irresponsibility of stakeholders contributed to the larger mess that was made.”

The third area builds on the idea that, “stakeholder responsibility can help us in our thinking about how to create organizations where ethical disasters and failures are rare.” “We need to better understand what factors help determine whether stakeholders act responsibly or not, and use that knowledge to come up with better approaches to designing, managing, and sustaining organizations.”

The fourth area is that both Goodstein and Wicks “think that stakeholder responsibility is already an implicit part of how many companies think about and create outstanding performance.” “They have to get stakeholders to become passionate about the organization and its practices if they want to keep their best employees, generate quality products, maintain customer loyalty, and get suppliers to help control costs and introduce innovation.”

“The fifth and final area where [they] see great potential for leveraging stakeholder responsibility is in tackling business challenges in ways that rely increasingly on corporations and stakeholders taking joint responsibility.”

In its entirety, the article analyzes “how stakeholder responsibility can become a platform for creating engagement, sharing responsibilities, generating novel forms of cooperation cross a wide array of stakeholders, and finding mutually beneficial solutions to issues that matter to all.” “While it is important to ‘think’ and ‘talk’ the language of stakeholder responsibility, as [their examples] suggest, it is through the practice of stakeholder responsibility and ‘walking the talk,’ that firms and stakeholders truly create an ethical business context. This is ultimately a responsibility that firms and stakeholders share.”

Excerpted from the article, “Corporate and Stakeholder Responsibility: Making Business Ethics a Two-Way Conversation” by Jerry D. Goodstein and Andrew C. Wicks, Business Ethics Quarterly, Vol. 17, No. 3, 2007, pages 375-398.

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On the Separation Thesis

Olsson Center Senior Fellows R. Edward Freeman and Jared D. Harris have written on the separation thesis in business. This thesis contends that there is a separate morality for business. Expressions such as “that’s a business decision” or “it’s business, not personal” contribute to this thesis.

R. Edward Freeman and Jared Harris

R. Edward Freeman and Jared Harris

In the “The Impossibility of the Separation Thesis” abstract, Freeman and Harris write “distinguishing ‘business’ concerns from ‘ethical’ values is not only an unfruitful and meaningless task, it is also an impossible endeavor. Nevertheless, fruitless attempts to separate facts from values produce detrimental second-order effects, both for theory and practice, and should therefore be abandoned.”

“…Amartya Sen’s On Ethics and Economics, in which Sen (1987) specifically suggests that we have forgotten that economics is inherently entangled with matters of ethics, and argues that the false dichotomization of the two has impoverished discipline-based analysis in both economics and ethics.”

“Therefore the problem with the separation thesis is not so much that it actually separates business and ethics – an impossible task – but that it purports moral neutrality while surreptitiously encapsulating certain ethical values and assertions.”

“Granted, sometimes in research it may be useful to emphasize part of a narrative in the foreground, and shift other issues to the background. This is true in economics where many interesting ideas have been worked out by holding human complexity to a minimum. Likewise in ethics it is sometimes useful to focus solely on the complexity around difficult ideas like ‘fairness’ or ‘responsibility’ without having to discuss the complexities of global value creation and trade.”

Excerpted from the article, “The Impossibility of the Separation Thesis,” by R. Edward Freeman and Jared D. Harris, Business Ethics Quarterly, Vol. 18, No. 4, October 2008, pages 541-548.

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Adam Smith’s Legacy for Ethics and Economics

Patricia H. Werhane

Patricia H. Werhane

Olsson Center Senior Fellow Patricia H. Werhane has written about interpretations of Adam Smith and capitalism in the past. In a 2006 article, she challenges a popular understanding of the Wealth of Nations. According to the popular reading of Smith, self-interested, economic actors in free competition with each other unintentionally create a self-constraining system. This system, the “invisible hand” which governs market transactions, functions both to regulate these self-interests and to produce economic growth and well-being such that no one actor or group of actors can take advantage of other actors or take advantage for very long.

Werhane suggests that this is a misreading of Smith. Smith is not a laissez-faire economist. Economic exchanges occur and markets are efficient, according to Smith, precisely because we are not merely non-tuistic, and economic growth depends on what today we call the rule of law. Smith was the Professor of Moral Philosophy at Glasgow, and argues precisely against, and may not have even imagined, a separation of ethics from economics, ethics from commerce; or ethics from his idea of a viable political economy

Read the entire article here.

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Corporate Speech and Stakeholders

At a recent discussion on the Citizens United v. Federal Election Commission case at the University of Virginia, a speaker stated that most publicly traded companies do not contribute to political campaigns and political action committees. The reasons the speaker gave were public companies are generally risk adverse and do not want to alienate stakeholders, and the proxy process for approving such actions is cumbersome. The speaker noted that closely-held companies are often the biggest contributors to campaigns during election cycles.

There is much debate about whether corporations and CEOs should engage in political speech. Recent U.S. Supreme Court decisions have affirmed that companies are entitled to free speech, even when exercised through campaign spending. Over the past few years there have been several media stories about individual CEOs’ views which have led to boycotts.

Since the U.S. has a two-party system that roughly divides the electorate, political speech has the potential to upset one-half of the customer base. There are other consequences for firms to consider: shareholders could disagree with a political contribution and seek removal of the CEO. In addition, other stakeholders, such as suppliers and employees, could be unfairly associated with a company’s views.

In practical matters, while the speaker argued for more corporate speech, he noted the public company proxy process was highly inefficient. The need for individual stockholders to weigh in by voting slows down decision-making.

Should companies engage in free speech? Many would argue yes, that it is their right. However, should they risk alienating their stakeholders, such as customers, shareholders, suppliers and employees?

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Stakeholder Capitalism

freeman-martin-parmar

R. Edward Freeman, Kirsten Martin and Bidhan Parmar

How one views capitalism can inform business decisions and operational values. In a 2007 article, Freeman, Martin and Parmar write: “Traditional narratives of capitalism rely upon the assumptions of competition, limited resources, and a winner-take-all mentality as fundamental to business and economic activity. These approaches leave little room for ethical analysis, have a simplistic view of human beings, and focus on value-capture rather than value creation.”

One traditional narrative is Investor Capitalism which states “…the purpose of the capitalist system is to increase wealth for the investor. In fact, any consideration outside that goal – for example, consideration of the welfare of customers, concern for the community, or charity – is seen as in competition with investor needs and diverting resources away from the primary goal.”

The authors discuss other popularly-held concepts of capitalism; these “…assumptions about markets and capitalism that we believe to be counterproductive. Each narrative assumes that market participants have a naive version of self-interest (that one’s self-interest is not connected to, or doesn’t take into account the self-interests of others), that morality is separate from (or even antithetical to) economic prosperity, and that competition for limited resources (value as a zero-sum game) is the dominant mode of prosperity.”

Additionally, they note: “…we have mistakenly taught managers that business within capitalism is by its very nature amoral.”

“Rather than acknowledging the moral dimensions of every decisions – whether in business or not – academics and practitioners have created a separate sphere of norms, rules, and morals and named it capitalism where competition and winning dictate the rules of the game.”

They continue “…survival of the fittest narrative of capitalism ignores the fact that moral concepts, such as relationships, mutually beneficial agreements, teams, trust, honesty, and care are necessary in those instances when survival of the individual, group, or organization is at stake.”

“Business should be about the best that we can create together, rather than about avoiding the worst. If we critically embrace a new set of assumptions about how value is created, the practice of business will soon follow. We do not have to sacrifice the great strides forward to solve some of the deeply troubling issues with capitalism. We need to think critically, acknowledge the social nature of value creation, and work with an insatiable passion to create value for our stakeholders.”

Excerpted from the article “Stakeholder Capitalism,” by R. Edward Freeman, Kirsten Martin and Bidhan Parmar. Originally published in the Journal of Business Ethics (2007) 74:303–314. (c) Springer 2007.

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The Evolution of Capitalism

Capitalism is in the news a lot these days. Pope Francis made global headlines for his critique of unbridled capitalism. Recently Professor R. Edward Freeman wrote about the future of capitalism in The Guardian, and it was met with vigorous discussion online. It is evident that this topic strikes a nerve with many people in the 21st century.

Even within academia, the Academy of Management’s 2013 Annual Meeting featured the theme of “Capitalism in Question.” Freeman participated on a panel with other distinguished professors, and most thought the world was in trouble because of capitalism.

However, there are several movements afoot in the business community to change the status quo. The Darden School of Business recently hosted Walter Robb, co-CEO of Whole Foods Market, to a packed auditorium of students and community members. Robb and his co-CEO John Mackey are a part of Conscious Capitalism, which champions four principles: higher purpose, conscious leadership, stakeholder orientation and conscious culture.

Whole Foods Market co-CEO Walter Robb speaks at the Darden School.

Whole Foods co-CEO Walter Robb at the Darden School.

In his talk Robb mentioned other similar movements, such as Virgin Group CEO Richard Branson’s Enlightened Capitalism and Bill Gates’ Creative Capitalism. He saw all of these ideas as an “evolution of capitalism” for the greater good.

Throughout history ideas have constantly evolved. Is it time for capitalism to evolve?

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What Stakeholder Theory is Not

Excerpted from an article by Robert Phillips, R. Edward Freeman and Andrew C. Wicks

circlesThe word “stakeholder” has become a commonly used term in business and in other sectors. The term means many different things to many different people and hence evokes praise or scorn from a wide variety of scholars and practitioners of myriad academic disciplines and backgrounds. Such breadth of interpretation, though one of stakeholder theory’s greatest strengths, is also one of its most prominent theoretical liabilities as a topic of reasoned discourse. Much of the power of stakeholder theory is a direct result of the fact that, when used unreflectively, its managerial prescriptions and implications are nearly limitless.

At its current stage of theoretical development, stakeholder theory may be undermined from at least two directions: distortions and friendly misinterpretations.

Critical Distortions:

  1. Stakeholder theory is an excuse for managerial opportunism (Jensen 2000; Marcoux 2000; Sternberg 2000).
  2. Stakeholder theory cannot provide a sufficiently specific objective function for the corporation (Jensen 2000).
  3. Stakeholder theory is primarily concerned with distribution of financial outputs (Marcoux 2000).
  4. All stakeholders must be treated equally (Gioia 1999; Marcoux 2000; Sternberg 2000).

Friendly Misinterpretations:

  1. Stakeholder theory requires changes to current law (Hendry 2001a, 2001b; Van Buren 2001).
  2. Stakeholder theory is socialism and refers to the entire economy (Barnett 1997; Hutton 1995; Rustin 1997).
  3. Stakeholder theory is a comprehensive moral doctrine (Orts and Strudler 2002).
  4. Stakeholder theory applies only to corporations (Donaldson and Preston 1995).

Read the full article, “What Stakeholder Theory is Not.” Originally published in Business Ethics Quarterly, Vol. 13, No. 4, Oct., 2003.

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A New Future for Microfinance Institutions?

by Brad Brown, Professor at the U.Va. McIntire School of Commerce and Olsson Center Senior Fellow

Professor Brad Brown

Professor Brad Brown

Microcredit and microfinance have captured the imagination of the world by providing what appears to be a successful model of economic development in which poor people lift themselves out of poverty by starting small businesses with the help of very small loans.  The popular image of microcredit is that of poor villagers, mostly women, organized in five or six person support groups, borrowing small amounts of money to start “cottage” businesses to earn a little money to help their families.

However, as the microfinance industry has grown and spread around the world, almost all of the stereotypes about microfinance have been challenged.  Allegations that microfinance institutions charge usurious interests rate and pressure the poor to take on excessive risk and debt have become well known.  So many institutions claim to provide “microcredit” that the term has become meaningless except that loans are generally small and not regulated by any government.

We suggest a new future for microfinance institutions (MFIs).  In order to better serve the needs of the poor, we propose government regulation, improved organizational governance and business models for MFIs.  With a strict definition of “microfinance” true microfinance can be properly distinguished from other forms of financial activities.  With adequate regulation and supervision, MFIs can take deposits from the poor thus providing a valuable service while obtaining money to lend. We propose that MFIs meet a strict definition and then be regulated and monitored to protect borrowers, which will also help to legitimize the microfinance industry.

The complete article, “Is It Time to Regulate Microfinance?” can be viewed online at Progress in Development Studies. My co-authors were Fahkruddin Ahmed and Susan Perry Williams.

 

 

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Stakeholder Strategy and Resiliency

At a recent public forum for local business owners, Olsson Center Senior Fellow Jared Harris asked, “what is the purpose of business?” The audience, made up of sustainable business owners responded with answers about passion, purpose and a need to fulfill in the community. However, one owner remarked “what about making money?” Harris, who teaches strategy and business ethics, opened the conversation more to talk about the tension between making money and filling a need. Ultimately Harris believes the purpose of business is to create value, and profits are outcomes.

Photo by Abena Foreman-Trice

Photo by Abena Foreman-Trice

The talk, “Lessons from Businesses That Have Weathered the Storm,” is part of the Charlottesville-area Better Business Challenge, a competition among local businesses to incorporate sustainable practices into day-to-day operations. In its second year, the competition also aims to promote companies that have green business models in the community.

Harris offered insights from his research on resiliency in small companies in Virginia. According to Sutcliffe and Vogus, resiliency is “the capacity to rebound from adversity strengthened and more resourceful.”

In his research, Harris and his co-author identified three ways that businesses achieve resiliency:

  1. Psychological strategy, i.e. having a positive attitude to cope
  2. Operational strategy, i.e. what can be changed
  3. Stakeholder strategy, i.e. engagement and cooperation with stakeholders

After analyzing responses from 150 small businesses, he found that there was a positive relationship between a stakeholder approach and profitable growth. “Engaging with external stakeholders pays off,” said Harris.

 

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