5/28/2008
R. Edward Freeman
The Darden School
freemane@darden.virginia.edu
26May 2008
(c) 2008 R. Edward Freeman. All rights reserved.
BEYOND SCANDAL:
THE REAL ETHICS CRISIS IN BUSINESS
OUTLINE
5/28/2008
(c) 2008 R. Edward Freeman. All rights
reserved.
The Call for a Revolution
 The Old Story
 The New Story of Business
 The Role of Responsibility, Sustainability, and
Ethics
 Creating Value in the New Story.

WE NEED A REVOLUTION IN BUSINESS
(c) 2008 R. Edward Freeman. All rights
reserved.
Lockheed, FCPA, Oil for Food
 Enron, Sarbox, mortgage meltdown
 Nothing new here.

5/28/2008
Unprecedented change.
 Old models, frameworks, and theories don’t work
very well.
 Continuous cycle of crisis, over response, crisis.

THE CRISIS IS OUR STORY ABOUT BUSINESS:
THE STANDARD STORY
3.
4.
5.
Read the papers, listen to the news, talk to your
children’s teachers and friends. You’ll hear this
story.
(c) 2008 R. Edward Freeman. All rights
reserved.
2.
Business is primarily about making money and
profits.
The only constituency that really matters are
shareholders.
Capitalism works because people are completely
self-interested, and will only act for others if they
have the proper incentives.
Given the opportunity, business people will cheat or
cut corners.
Business works because people are competitive and
greedy, and as if by an invisible hand: the greatest
good emerges.
5/28/2008
1.
TOWARDS A NEW STORY ABOUT BUSINESS
Business is primarily about making money and profits.

Business is primarily about purpose.
Money and profits follow.
(c) 2008 R. Edward Freeman. All rights
reserved.
OR
5/28/2008

TOWARDS A NEW STORY ABOUT BUSINESS
The only constituency that really matters are shareholders.

Any business creates (or sometimes
destroys) value for shareholders, as well as
customers, employees, suppliers, and
communities. Building and leading a
business involve getting these interests
going in the same direction.
(c) 2008 R. Edward Freeman. All rights
reserved.
OR
5/28/2008

TOWARDS A NEW STORY ABOUT BUSINESS
OR

Capitalism works because we are complex
creatures with many needs and wants, and
we can cooperate to create value for each
other. Sometimes we act for selfish reasons
and sometimes for “other-regarding”
interests. Incentives are important, but so
are values.
(c) 2008 R. Edward Freeman. All rights
reserved.
Capitalism works because people are completely selfinterested, and will only act for others if they have the
proper incentives.
5/28/2008

TOWARDS A NEW STORY ABOUT BUSINESS
Given the opportunity, business people will cheat
or cut corners.

Most people tell the truth and keep their
promises, and act responsibly most of the
time. And, we need to expect that behavior
(c) 2008 R. Edward Freeman. All rights
reserved.
OR
5/28/2008

TOWARDS A NEW STORY ABOUT BUSINESS
Business works because people are competitive and greedy,
and as if by an invisible hand: the greatest good emerges.

Business and capitalism are the greatest
system of social cooperation and value
creation, ever invented. Competition is
important in a free society, since it ensures
options. But, the engine of capitalism is
value creation.
(c) 2008 R. Edward Freeman. All rights
reserved.
OR
5/28/2008

TOWARDS A NEW STORY ABOUT BUSINESS
1.
4.
5.
(c) 2008 R. Edward Freeman. All rights
reserved.
3.
5/28/2008
2.
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 involve getting these
interests going in the same direction.
Capitalism works because we are complex creatures with many
needs and wants, and we can cooperate to create value for each
other. 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 behavior.
Business and capitalism are the greatest system of social
cooperation and value creation, ever invented. Competition is
important in a free society, since it ensures options. But, the engine
of capitalism is value creation.
Let’s tell this story and expect it of businesspeople, and make it
come true.
ELEMENTS OF THE NEW STORY
5/28/2008
(c) 2008 R. Edward Freeman. All rights
reserved.
Lots of the elements of the old story plus…
 Corporate Responsibility
 Sustainability
 Ethics and Ethical Leadership
 “Social Entrepreneurship”
 Increased role for Civil Society

THE FOUR FORCES OF STAKEHOLDER CAPITALISM
5/28/2008
Value
Creation
* Corporate Stakeholder
Responsibility and
Responsible Stakeholders
Responsibility
VA
xx
xx
*Sustainable Value
Creation
Sustainability
*Ethical Value Creation
Ethics
(c) 2008 R. Edward Freeman. All rights
reserved.
* Value Creation for
Stakeholders
(c) 2008 R. Edward Freeman. All rights
reserved.
LISTEN TO WHAT CEOS AND OTHER
BUSINESS LEADERS ARE SAYING…
5/28/2008
A Brief Report from the Field
RESPONSIBLY.
---CEO NON US MULTINATIONAL FMCG
(c) 2008 R. Edward Freeman. All rights
reserved.
WINNERS WILL BE THOSE COMPANIES WHO ACT
RESPONSIBLY AND ARE PERCEIVED TO ACT
5/28/2008
CORPORATE RESPONSIBILITY IS THE MOST
IMPORTANT ISSUE OF THIS CENTURY. THE
CORPORATIONS EXIST BECAUSE SOCIETY SAYS
COMPACT.”
---CEO FINANCIAL SERVICES COMPANY
(c) 2008 R. Edward Freeman. All rights
reserved.
THEY CAN — AND SOCIETY ASSUMES THAT
WE’LL CONTRIBUTE TO THE COMMON GOOD.
THAT’S THE BARGAIN WE STRIKE. THE SOCIAL
5/28/2008
“A SOCIALLY RESPONSIBLE COMPANY STRIVES
TO MEET A STANDARD THAT’S HIGHER THAN
THE BOTTOM LINE, WE MUST REMEMBER THAT
---CEO TECHNOLOGY
COMPANY
(c) 2008 R. Edward Freeman. All rights
reserved.
THE CONSISTENT MESSAGE TO MANAGERS AND SALES
REPRESENTATIVES IS TO PRODUCE IN AN ETHICAL
MANNER—FOLLOW ALL THE RULES AND LISTEN TO
THE CUSTOMER. ETHICAL TRADE-OFFS CAN APPEAR
TO HAVE SHORT-TERM ADVANTAGES, BUT THEY
USUALLY DON’T, AND THEY CERTAINLY DON’T IN THE
LONG RUN.”
5/28/2008
“WE OPERATE IN A VERY COMPETITIVE ENVIRONMENT
AND THE PRESSURE TO PRODUCE IS INTENSE, BUT
5/28/2008
---CEO MAJOR RETAILER
(c) 2008 R. Edward Freeman. All rights
reserved.
“IN TODAY’S WORLD, THE RULES HAVE CHANGED
AND WE ALL HAVE TO ADAPT TO THAT.”
---CEO CHEMICAL INDUSTRY
(c) 2008 R. Edward Freeman. All rights
reserved.
EVEN WHEN OUR LAWYERS TELL ME WE
SHOULDN’T. PEOPLE HAVE TO KNOW WE’RE
SERIOUS ABOUT THESE ISSUES.
5/28/2008
WE PUBLICIZE OUR ETHICS VIOLATIONS,
(c) 2008 R. Edward Freeman. All rights
reserved.
---CEO INDUSTRIAL PRODUCTS
5/28/2008
WE HAVE TO PAY ATTENTION TO THESE
THINGS. OUR RECRUITS ARE ASKING LOTS OF
QUESTIONS. PLUS…WHOSE STANDARDS ARE
RELEVANT TO US. WE’RE A GLOBAL
COMPANY.
---CEO INDUSTRIAL PRODUCTS
(c) 2008 R. Edward Freeman. All rights
reserved.
THAT HELP US FIGURE OUT WHAT TO DO ALL
OVER THE WORLD?
5/28/2008
YOU GET FIRED FOR MISSING ON INTEGRITY
NOT FOR MISSING NUMBERS. HOW DOES
5/28/2008
LAWYERS ARE FIGURING OUT WAYS FOR YOU TO DO
STUFF THAT YOU REALLY DON’T UNDERSTAND. YOU
HAVE TO ASK YOURSELF SOME PRETTY BASIC
QUESTIONS TO CUT THROUGH THAT STUFF.
---POWER INDUSTRY CEO
(c) 2008 R. Edward Freeman. All rights
reserved.
IT’S TOUGH TO BE TOLD EVERY DAY THAT YOU’RE
BEING STUPID. ACCOUNTANTS, CONSULTANTS, AND
5/28/2008
---FINANCIAL SERVICES CEO
(c) 2008 R. Edward Freeman. All rights
reserved.
I’M PRETTY SURE THAT THIS MEETING WITH A
DISGRUNTLED EMPLOYEE LEADS NOWHERE. HE’S A
KNOWN “TROUBLEMAKER”, BUT IF I DON’T SPEND
TIME WITH HIM, THEN THE PERSON WHO HAS
SOMETHING IMPORTANT TO SAY WON’T TELL ME.
---CEO OF A BANK
(c) 2008 R. Edward Freeman. All rights
reserved.
CUSTOMERS MONEY THAT THEY REALLY
COULDN’T AFFORD TO PAY BACK WAS A GOOD
IDEA. SO, WE REALLY DIDN’T GET CAUGHT
VERY MUCH IN THIS SUBPRIME THING.
5/28/2008
WE JUST DIDN’T SEE HOW LENDING OUR
PHARMACEUTICAL INDUSTRY.
---FORMER PHARMACEUTICAL CEO
(c) 2008 R. Edward Freeman. All rights
reserved.
ABSOLUTELY NO LEADERSHIP IN THE
5/28/2008
PEOPLE DON’T HAVE TO DIE FROM AIDS.
WHAT’S HAPPENING WITH HIV IN AFRICA
IS A MORAL OUTRAGE…THERE IS
5/28/2008
(c) 2008 R. Edward Freeman. All rights
reserved.
I THINK WE’RE PRETTY GOOD AT THIS STUFF.
BUT, WHAT KEEPS ME AWAKE AT NIGHT IS
THAT SOME ONE—MAYBE AN EMPLOYEE HALF
A WORLD AWAY—IS GOING TO SEND ME TO JAIL
AND BRING OUR COMPANY DOWN, AND I DON’T
EVEN KNOW ABOUT IT.
---CONGLOMERATE CEO
5/28/2008
BRAND IS AT RISK WITH EVERYONE WE HIRE.
---TELECOM CEO
(c) 2008 R. Edward Freeman. All rights
reserved.
I HAVE TO PAY MORE ATTENTION TO THE
PROCESS BY WHICH WE HIRE PEOPLE. OUR
---EUROPEAN AGRIBUSINESS EXECUTIVE
(c) 2008 R. Edward Freeman. All rights
reserved.
YOU SEE THE CONDITIONS THAT PEOPLE LIVE
IN, WE OWE THEM THE CHANCE TO DEVELOP
THEMSELVES AND THEIR RESOURCES. BUT, WE
CAN’T DO IT IN A WAY THAT IS NOT
SUSTAINABLE.
5/28/2008
WHEN YOU ACTUALLY GO TO COUNTRY X AND
BEING.
---ITALIAN EXECUTIVE, PACKAGING INDUSTRY
(c) 2008 R. Edward Freeman. All rights
reserved.
HAD A COST ATTACHED TO IT AND FOUND OUT
IT WAS PROFITABLE. IT IS SIMPLY A WAY OF
5/28/2008
SUSTAINABILITY IS TODAY WHAT QUALITY WAS
TO THE 1980S. WE THOUGHT THAT QUALITY
5/28/2008
(c) 2008 R. Edward Freeman. All rights
reserved.
WE’RE TRYING TO FIX THE FACTORIES, EVEN
THOUGH THEY BELONG TO OUR SUPPLIERS.
NOW WE ARE GETTING PRESSURE TO FIX CHILD
LABOR IN THE FLOWER FIELDS. THE DYE THAT
GOES INTO OUR PRODUCTS COMES FROM THESE
FLOWER FIELDS. I’M HAVING ENOUGH
TROUBLE WITH THE FACTORIES. WHAT DO I
DO ABOUT THE FLOWER FIELDS?
---NIKE EXECUTIVE
5/28/2008
---CHEMICAL INDUSTRY CEO
(c) 2008 R. Edward Freeman. All rights
reserved.
YOU CAN’T RESPOND TO EVERY BIT OF NOISE THAT
YOU HEAR—BUT IF YOU DON’T RESPOND TO THE
“RIGHT” NOISE, THEN YOU GET HAMMERED.
SUSTAINABILITY, SOCIAL RESPONSIBILITY, AND
ETHICS ARE NOT “NICE TO DO”. IF YOU WANT
THE BEST TALENT THEY ARE BUSINESS
IMPERATIVES.
---US FOOD INDUSTRY EXECUTIVE
(c) 2008 R. Edward Freeman. All rights
reserved.
GOOD ABOUT THE COMPANIES THEY WORK FOR.
5/28/2008
TODAY’S YOUNG EMPLOYEES WANT TO FEEL
5/28/2008
THINK ABOUT THESE CASES…
(c) 2008 R. Edward Freeman. All rights
reserved.
IN THE WORDS OF ONE CEO, HOW DO I MAKE
DECISIONS WHEN I DON’T EVEN KNOW HOW TO
THINK ABOUT THIS ISSUE?
HIV IN AFRICA AND THE US BANK
5/28/2008
(c) 2008 R. Edward Freeman. All rights
reserved.
A CEO of a large US Bank wondered how he
should think about the issue of HIV in Africa.
The bank had no operations in Africa, but it had
many African American employees, a group of
whom have come to the CEO and asked what the
bank was doing on this issue. One leading
industry executive and physician claimed that
the scientists had turned HIV into a chronic
disease like diabetes, yet thousands of people
were dying daily of the disease in many parts of
the world.
 What advice would you give to this CEO

THE BUSINESS MODEL DILEMMA
How should Company A compete?
(c) 2008 R. Edward Freeman. All rights
reserved.

5/28/2008
Company A had a business model that depended
on low wages and low benefits to employees.
They employed the very best techniques of
efficiency management to insure that employees
were productive.
 Company B in the same industry had a similar
wage structure but paid educational and health
benefits for all employees, even part time ones.
Company B’s product mix was different from A,
but the two competed for entry level employees.

IN THE NEWS
How should the executives at Company X think
about this issue?
(c) 2008 R. Edward Freeman. All rights
reserved.

Company X was a leading technology company in
industry A. There technology was a key to
improving the efficiency of the conversion of plant
stocks to fuel. Company X had a worldwide
reputation for social responsibility and
stakeholder engagement. They awoke one
morning to discover that were associated with
poverty and hunger, simply because their
technology helped make fuel from plants.
5/28/2008

THE DEVELOPMENT PROGRAM
How should they think about this challenge?
(c) 2008 R. Edward Freeman. All rights
reserved.

Company Y understands much of what we have
talked about. They believe that they need to
develop their managers to deal with this new
world. But, they must continue to get results
from the old business model built on shareholder
value and relative predictability.
5/28/2008

A SIMPLE IDEA
(c) 2008 R. Edward Freeman. All rights
reserved.
is about creating value for
stakeholders.
 The only task of the executive is to create
as much value for stakeholders as
possible.
 Suppliers, customers, employees,
financiers, and communities determine
the ultimate success of a company.
 Great companies create win-win
relationships with stakeholders that
endure over time.
5/28/2008
 Business
THE MANAGING FOR STAKEHOLDERS MINDSET:
TEN PRINCIPLES
2.
We need to have a philosophy of
volunteerism—to engage stakeholders
and manage relationships ourselves,
rather than leaving it to government.
3.
We need solutions to issues that satisfy
multiple stakeholders simultaneously.
(c) 2008 R. Edward Freeman. All rights
reserved.
Stakeholder interests go together over
time.
5/28/2008
1.
THE MANAGING FOR STAKEHOLDERS MINDSET:
TEN PRINCIPLES
5.
We act with purpose that fulfills our
commitment to stakeholders. We act with
aspiration towards fulfilling our dreams and
theirs.
6.
We need intensive communication and
dialogue with stakeholders—not just those who
are friendly.
(c) 2008 R. Edward Freeman. All rights
reserved.
Everything that we do serves stakeholders. We
never trade off the interests of one versus the
other continuously over time.
5/28/2008
4.
THE MANAGING FOR STAKEHOLDERS
MINDSET: TEN PRINCIPLES
8.
We need to generalize the marketing
approach.
9.
We engage with both primary and
secondary stakeholders.
10.
We constantly monitor and redesign
processes to make them better serve our
stakeholders.
(c) 2008 R. Edward Freeman. All rights
reserved.
Stakeholders consist of real people with
names and faces and children. They are
complex.
5/28/2008
7.
Enterprise Strategy
The Basic Value Proposition
Stakeholders
and
Principles
Principles for Sustained Stakeholder
Cooperation
Societal Context
And
Responsibility
Understanding the Broader Societal
Principles of Ethical Leadership
Ethical Leadership
(c) 2008 R. Edward Freeman. All rights
reserved.
Purpose
and
Values
5/28/2008
Ethical Leadership
ENTERPRISE STRATEGY
Stakeholders
and
Principles
•Values/Aspirations
•Making SH Better Off
•Legacy
The Basic Business
or
Value Proposition
Questions:
• What do we stand for?
• What are our aspirations?
• For whom do we want to create value?
• How do we make each stakeholder better off?
• What do we want to leave behind for others?
Societal Context
And
Responsibility
Ethical Leadership
(c) 2008 R. Edward Freeman. All rights
reserved.
Purpose
and
Values
5/28/2008
Ethical Leadership
Enterprise Strategy
Questions:
• What are the major tradeoffs that we make
in managing our stakeholder relationships?
•What are we doing to improve these
tradeoffs?
Stakeholders
and
Principles
Societal Context
And
Responsibility
•PVPs underlying
all stakeholders
•PVPs for specific
stakeholders
Values driven
Stakeholder
Management
• What principles, values and policies are
we committed to so that stakeholders can
count on our support and our actions?
•Are there principles, values and policies
that underlie all our stakeholder
relationships?
(c) 2008 R. Edward Freeman. All rights
reserved.
Purpose
and
Values
5/28/2008
Ethical Leadership
Enterprise Strategy
Societal Context
And
Responsibility
•Societal Trends
•Critics
•Governance
Ethical Leadership
Stakeholder Dialogue
and
Engagement
(c) 2008 R. Edward Freeman. All rights
reserved.
Stakeholders
and
Principles
5/28/2008
Purpose
and
Values
Questions:
• What are our most vocal critics saying about
us?
• Is there a way of opening a dialogue with our
critics so that we can learn from them how to
realize our purpose and principles in a better
way?
• What issues are on the horizon in society that
will affect the kind of company that we want to
be in the next ten years?
• What obligations, principles, and governance
mechanisms do we want to use to interact with
stakeholders who have become our critics (or
stakeholders we have not explicitly
recognized earlier)?
5/28/2008
“SERVING ALL YOUR STAKEHOLDERS IS THE BEST WAY TO
SHAREHOLDERS.
(c) 2008 R. Edward Freeman. All rights
reserved.
PRODUCE LONG TERM RESULTS AND CREATE A GROWING,
PROSPEROUS COMPANY…LET ME BE VERY CLEAR ABOUT
THIS: THERE IS NO CONFLICT BETWEEN SERVING ALL YOUR
STAKEHOLDERS AND PROVIDING EXCELLENT RETURNS FOR
IN THE LONG TERM IT IS IMPOSSIBLE TO
HAVE ONE WITHOUT THE OTHER. HOWEVER, SERVING ALL
THESE STAKEHOLDER GROUPS REQUIRES DISCIPLINE,
VISION, AND COMMITTED LEADERSHIP.”
--BILL GEORGE, FORMER CEO MEDTRONIC