Responsible Business without Trade-Offs

Interview with Professor E. Freeman

by Annalisa Filomena – Junior Strategy Consultant, The Decision Group

R. Edward “Ed” Freeman is a University Professor and Elis and Signe Olsson Professor of Business Administration at the University of Virginia Darden School of Business. He is the author of the widely influential book Strategic Management: A Stakeholder Approach (2010, originally published in 1984) and has worked with executives and companies around the world. He is a teacher, consultant, speaker and thought leader in the fields of Stakeholder Management, Business Ethics and Executive Leadership. He also teaches Leading with Meaning, helping organizations create a culture that brings out the best in everyone. We just had the great opportunity to virtually meet “Ed” Freeman during the Maximize Your Business Impact workshop on September 22nd organized by The Decision Institute. His joyful and brilliant presence inspired a group of business leaders, CEOs, managers and shareholders about the changing role of the CEO in the 21st century and the new role of businesses in society. With the aftermath of Covid-19 in our lives as the new normal, leaders strive to steer their corporate ships through unimaginably stormy waters. As Covid-19 continues to create uncertainty and concern for businesses, people and societies, purposeful business behaviour has come to the fore. Also, successful organizations are taking actions to balance multi-stakeholders needs and embracing a long-term view when nurturing relationships across their entire ecosystem. In this interview, Professor E. Freeman will give us insights into the interdependencies of businesses with their end-to-end ecosystems and the new story of the business.

The companies that are successful have figured out how to keep trade-offs out of their business models and integrate economic, financial, social, political, environmental and ethical issues. Win-win thinking is much more important in driving your business through the crisis.

The Breakthrough

Why talking about “Responsible Business”?

“Being a responsible business is essentially a company that gives attention to its stakeholders. Companies that are committed to some notion of responsibility, those who have a purpose behind profits and see the need of engaging various stakeholders (employees, customers, suppliers, communities, shareholders etc.), are much more likely to make it through the crisis than those who are just worried about money and finance. If you take care of your employees they will make extra efforts for you. If you treat customers well so that they can get the services and products safely, they will stay loyal to your brand. If you can help your suppliers they will support you in return and the same applies to the communities you are acting in. The key is to keep everyone healthy in your ecosystem, and this is a must to make your
company survive. You may experience a downturn, but it is always necessary to keep everyone around so that they can support you after. If you want to start with one stakeholder choose your employees first. Keep them safe and make sure they can deliver value for your customers”.

What is the new story about business?

“Ever since the global financial crisis (GFC), there have been lots of calls for revising how we think about businesses and capitalism. In addition to the GFC, globalization and the controversy surrounding it have a long history and a large impact on business. Alongside globalization, advances in information technology have increased the awareness of business’ effects on the rest of society, solidifying the idea that business and ethics are, in fact, connected. There have been lots of proposals for reforms. In the latest book “The Power of And”, we decided not to pick one of these proposals but rather to think about the key ideas that any proposal for reform has to satisfy. The first element that characterizes a new form of businesses is the presence of purpose and profit. Businesses need to put the two concepts
together. Also, the trade-offs between shareholders and stakeholders, being societal and a market-governed institution and ethics and business have to be removed. The new story of business takes a much broader view and builds a form of capitalism that is worthy of human beings, and of a place we want our children to work. We know in our heart this new way is the right way to look at businesses. Companies should look behind the definitions and the models, and think deeply about their purpose and put it at the centre of their strategy. Again, their purpose is connected to their stakeholders and the way they create value for their activities. Stakeholders are also interdependent and create/ destroy value among themselves. It is not possible to manage them by looking only at the trade-offs.”

What are the key ideas behind the new models?

  1. Business and ethics must be integrated into holistic business models.
    The two concepts must go together without separating the business decisions from ethical decisions. In the real world, almost all business decisions have ethical content.
  2. Business is all about value creation for stakeholders.
  3. Purpose, values, and ethics are as important as money/profits.
    We can no longer make the mistake that the pursuit of profits is the sole purpose of business. Real purpose inspires both employees and other stakeholders who come to share that purpose.
  4. Business is embedded in society and in a physical world.
    Business is not an isolated institution, it is embedded in other social institutions such as governments, families, and religious institutions.
  5. People are complex.
    The major economic narrative describes individuals as rational and self-interested decision-makers. However, a much more inspirational view of human beings has emerged. Business is run by people who have multiple goals and identities, people who are not just “rent-seekers” looking to manipulate resources or policies purely for economic gain without giving back to society. “These five ideas are mutually supportive. It is because purpose matters, that people and groups who are affected by a purpose must be engaged. Stakeholders are all engaged with the creation of value for each other. We are all embedded in our societal institutions in the context of complex human relationships. The companies that are successful have understood these linkages and figured out how to keep trade-offs out of their business models and integrate economic, financial, social, political, environmental and ethical issues. Also, successful businesses are able to integrate the stakeholders in a way they can all participate in supporting and realizing the purpose of the organization”.

What would be your piece of advice for business leaders?

“Purpose is more important than ever. You have to know how you create value for your stakeholders, how they
are connected to one another and how you engage them. Your employees are your partners, and you have a relationship with them. It is not possible to reduce relationships to financial transactions and scores. Also, it is too easy to look at trade-offs. They are a failure of the imagination because you have renounced the opportunity to satisfy both sides of the party. The win-win thinking is much more important in driving your business through the crisis”.

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