Business meets ethics
[ The University of Melbourne Voice Vol. 5, No. 7
12 October - 8 November 2009 ]
The current business model of capitalism has failed and is beyond repair. Visiting Professor Ed Freeman argues that only an ethical foundation can lead to its revival. Shane Cahill reports.
You’re not likely to die wondering with Ed Freeman, the blues guitar- toting Professor of Business Administration at the University of Virginia who is currently the Visiting Gourlay Professor of Ethics in Business at Trinity College at the University of Melbourne (pictured right).
“Public trust in capitalism is at an all time low and there is a conceptual crisis in capitalism,” Professor Freeman told the audience in the upmarket RACV club in his lecture “Really Getting Out of the Mess: Putting Business and Ethics Together Once and For All”.
Ed Freeman is the guy who back in 1984 first got us to give some thought to consulting with our stakeholders through his award-winning book Strategic Management: A Stakeholder Approach.
Having sorted the stakeholder business out Professor Freeman is getting really serious.
Warming to his subject, he told his audience that capitalism’s failure is so comprehensive that we can only look to those few epoch-shaking events of human history – such as Galileo’s thought revolution that forced humans to acknowledge they were not the centre of the universe.
“It’s worn out, shop-worn and dead,” he says of the current capitalist business model.
“It’s the wrong idea about business, no reform of any sort will fix it and reforms will only make it worse.”
So here comes the revolution?
Not a chance. Professor Freeman is a capitalist through and through.
“Some days I wake up and think I’m the last remaining capitalist on earth,” he says.
His problem is that the current version of capitalism is its own worst enemy and he is about to save it.
At the root of the problem and its evil offspring the Global Financial crisis is the presumption that humans are motivated only by self-interest and that shareholder value is the only game in town.
“Capitalism is not about competition, but is the greatest system of co-operation ever invented,” he says.
That co-operation manifests itself in a business model that places human values, sustainability and common sense at its core and eschews the raw “carrot and stick” approach of the now discredited model.
Bringing his lifelong work in stakeholder theory to a logical conclusion, Professor Freeman sees the new model of co-operative capitalism as being an interconnected web of participants all of equal importance and value.
“We need a new story about business, a story that goes something like this: Business is primarily about purpose – money and profits follow. Any business creates (or sometimes destroys) value for shareholders, as well as customers, employees, suppliers, and communities. Building and leading a business involves getting these interests going in the same direction. Capitalism works because we are complex creatures with many needs and wants, and we can co-operate to create value for each other.”
Professor Freeman cites the example of a regional US bank that did not get into trouble with sub-prime loans for the simple reason that its board and management could see no sense in making loans to their own customers who everyone knew would not be able to make the necessary repayments.
Ethics and common sense go hand in hand in Professor Freeman’s business world view, which he is realistic enough to acknowledge is greeted in many quarters with varying degrees of scepticism.
“When I tell people I teach a course in business and ethics the response is ‘Business and ethics, that’s an oxymoron’, or ‘It must be a short course’,” he says.
“Sometimes we act for selfish reasons and sometimes for other-regarding interests. Incentives are important, but so are values. Most people tell the truth and keep their promises, and act responsibly most of the time. And, we need to expect that behaviour. When these expectations are not met, it is not just bad ethics, it is also bad business. Business and ethics go together.”
So how do we know? For Professor Freeman it’s a case of forget pious and verbose mission statements and don’t even mention saccharine philanthropy tacked onto bad business practices that try to buy back credibility through good deeds.
Professor Freeman offers two down-to-earth tests. The first is the calendar test that involved a conversation with his teenage son, Ben. Professor Freeman explained to him that a teaching commitment in Indonesia would keep him away from a previously agreed baseball summer camp.
“What’s more important, your family or your job?” asked Ben.
“My family, of course,” came the reply.
“Well, you’re not acting like it.”
Squirm. Baseball camp was on the Freeman calendar the following year, no ifs or buts.
The second is what he calls the newspaper test.
“Would you be willing to see yourself in your daily paper reporting what you did the previous day?”
And that blues guitar? At the age of 50 Professor Freeman started a blues band as a side project that nonetheless informs his thinking about business and values. Listening to a tape of the Allman Brothers slide master Warren Haynes going through his paces reminded him that “It‘s not the number of notes you play, it’s what you mean in those notes.
“For business it has to be what we mean to do, not just shareholder value.”
Professor R Edward Freeman is the Gourlay Visiting Professor of Business Ethics at Trinity College with a teaching role in the Melbourne Business School and the Faculty of Economics and Commerce. For more information on the Gourlay Professorship:
www.trinity.unimelb.edu.au/academic_programs/visiting_scholars/gourlay/about
For more information about Professor Freeman:
www.trinity.unimelb.edu.au/academic_programs/visiting_scholars/program/freeman
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