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Ethics in Business — an Oxymoron? Not so, says R. Edward Freeman

Renowned business ethicist R. Edward Freeman of the University of Virginia and creator of the stakeholder theory of capitalism, talks to Alphy, the maker of Reflect AI, about the ways that ethical practices drive business success.

In an engaging 2013 TEDx talk that at times could double for a standup comedy routine, R. Edward Freeman says that when he tells people he teaches business ethics, “People are polite and either have to manage not to laugh, or they say things like, “Oh, business ethics — a contradiction like ‘jumbo shrimp,’ an oxymoron.” 

They also misunderstand ethics to be “sort of angels and organ music to be talked about in hushed tones on Sunday,” he says in the TEDx video, drawing laughs from the crowd. 

But business ethics are no joke to the trailblazing professor at the University of Virginia’s Darden School of Business, who believes there’s a profound mismatch between the stories people tell about business and what it actually takes to run a successful business. 

Freeman changed the language of business around the globe 40 years ago with his pioneering stakeholder theory of business management, the subject of his seminal 1984 book Strategic Management: A Stakeholder Approach. He has argued for decades that companies should go beyond profits for shareholders and focus on morals and values in running organizations. He believes companies should focus on creating value for all stakeholders — customers, suppliers, employees, investors, the community, shareholders and others interconnected with the business — without making tradeoffs. 

In a recent video interview with Alphy, Freeman expanded on the vital role ethics plays in the business world, emphasizing that doing good is not just a moral obligation — it’s a key driver of business success.

One common misconception is the belief that business ethics is a set of rules for avoiding bad behavior. “Part of the problem is that the language of ethics that most people think about is ‘good, bad, right, wrong, ethical judgments,’” Freeman says. “But if you think about it, ethics is about how we treat each other, and it’s not all good, bad, right, wrong … a lot of what we do with each other affects the other person.”

Relationships are at the heart of business — from developing rapport and trust with colleagues to relationships with customers to the larger community and even the planet. 

Ethical corporate behavior, he says, goes beyond compliance. It includes “doing good for stakeholders, inventing products that make people's lives better, hiring people from diverse backgrounds,” he says. “Companies do a lot of good. They create value for more than just their shareholders. They create value for their stakeholders.”

But more often than not, when people think about ethics and business, they conjure up negative connotations, skeptical about the role of business in the world and associating businesses with taking the moral low ground in the quest for profits.

“A lot of the business ethicists have this idea that I've called a ‘business sucks’ story,” Freeman says. “It's kind of morally questionable because people are pursuing profit, and that's what makes business work. Well, that's part of what makes business work. But if that's all you do? You probably won't be around for very long, at least not these days. Because business is about human beings. It's about how we cooperate together, and we need to work that out."

Freeman wants us to turn our thinking around. 

“If I walk into a room and say, ‘Hey, we have a real ethics issue to deal with,’ there's not a soul in the room who's going to say, ‘Oh, you mean somebody invented something cool? It’s going to make our lives better?’” he notes. “Yeah, business does bad stuff and you need to avoid that. But it also does a lot of good stuff, and you want to celebrate that.”

AT&T and Apple are two companies he cites for doing good while doing good business, having changed the world with telephones and computers. He also points to Whole Foods, which pioneered the large-scale market for organic food (and supported Fair Trade practices), and the Container Store, which focused on employee satisfaction, resulting in only 10% turnover compared to the retail industry average of 67% and growing from a $35,000 investment in 1978 to $800 million in net sales in 2017. (“We would not be as profitable if we did less for our employees and vendors,” co-founder Kip Tindell told Ethical Systems, a research organization at New York University.)

“Name me companies other than the sin companies who have not made the world better,” Freeman challenges. “Most businesses are not saints or sinners. They're both. They have good stuff that they do. And sometimes they screw up as all of us do.”

And yet, officials in some quarters of the corporate world believe that the so-called softer side of business — values such as respect, empathy, and positivity — is irrelevant to operations and the bottom line. Not so, Freeman says. 

“Everyone who runs a business is making decisions about how to create value," Freeman says. "They want to know when they’re doing stuff right; they want their employees to know when they're doing stuff right.

“The staffing people, the HR people, and their compliance people, they're trying to protect the company," Freeman adds. "And the lawyers are the worst. I mean, look, they have a job to do — I'm not saying they don't. I'm just saying it's not about running the business that way. You look at companies that have run the business by what their lawyers said, and you're stuck with oil companies, tobacco companies, and God knows who else. Every CEO I know cares about this.”

Bottom line: Companies can frame ethics as a constraint, or they can frame ethics as a source of innovation and competitive advantage. As Freeman advises his TEDx talk audience, “Get the purpose right, and profits will follow.”

Carolyne Zinko is the editorial director and AI editor at Alphy.

In this occasional series, Alphy will interview leaders in business ethics to get their perspectives on trends and innovations around compliance and ethics at work, including new technologies and approaches, patterns in ethics breaches, and the role communication plays in ethics and compliance.

Reflect AI by Alphy is an AI communication compliance solution that detects and flags language that is harmful, unlawful, and unethical in digital communication. Alphy was founded to reduce the risk of litigation from harmful and discriminatory communication while helping employees communicate more effectively.


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