1. B EYOND S CANDAL : T HE R EAL E THICS C RISIS IN BUSINESS R. Edward Freeman The Darden School freemane@darden.virginia.edu 26May 2008 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

2. O UTLINE 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

3. W E N EED A R EVOLUTION IN B USINESS Unprecedented change. Old models, frameworks, and theories don’t work very well. Continuous cycle of crisis, over response, crisis. Lockheed, FCPA, Oil for Food Enron, Sarbox, mortgage meltdown Nothing new here. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

4. T HE C RISIS IS OUR S TORY ABOUT B USINESS : T HE S TANDARD S TORY 1. Business is primarily about making money and profits. 2. The only constituency that really matters are shareholders. 3. Capitalism works because people are completely self-interested, and will only act for others if they have the proper incentives. 4. Given the opportunity, business people will cheat or cut corners. 5. Business works because people are competitive and greedy, and as if by an invisible hand: the greatest good emerges. Read the papers, listen to the news, talk to your children’s teachers and friends. You’ll hear this story. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

5. T OWARDS A N EW S TORY A BOUT B USINESS Business is primarily about making money and profits. OR Business is primarily about purpose. Money and profits follow. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

6. T OWARDS A N EW S TORY A BOUT B USINESS The only constituency that really matters are shareholders. OR 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

7. T OWARDS A N EW S TORY A BOUT B USINESS Capitalism works because people are completely self- interested, and will only act for others if they have the proper incentives. 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

8. T OWARDS A N EW S TORY A BOUT B USINESS Given the opportunity, business people will cheat or cut corners. OR Most people tell the truth and keep their promises, and act responsibly most of the time. And, we need to expect that behavior 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

9. T OWARDS A N EW S TORY A BOUT B USINESS Business works because people are competitive and greedy, and as if by an invisible hand: the greatest good emerges. OR 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

10. T OWARDS A N EW S TORY A BOUT B USINESS 1. Business is primarily about purpose…money and profits follow. 2. 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. 3. 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. 4. Most people tell the truth and keep their promises, and act responsibly most of the time. And, we need to expect that behavior. 5. 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

11. E LEMENTS OF THE N EW S TORY Lots of the elements of the old story plus… Corporate Responsibility Sustainability Ethics and Ethical Leadership “Social Entrepreneurship” Increased role for Civil Society 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

12. T HE F OUR F ORCES OF S TAKEHOLDER C APITALISM VA Value Creation Responsibility SustainabilityEthics xx * Value Creation for Stakeholders * Corporate Stakeholder Responsibility and Responsible Stakeholders *Sustainable Value Creation *Ethical Value Creation 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

13. L ISTEN TO W HAT CEO S AND O THER B USINESS L EADERS A RE S AYING … A Brief Report from the Field 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

14. C ORPORATE R ESPONSIBILITY IS THE MOST IMPORTANT ISSUE OF THIS C ENTURY. T HE WINNERS WILL BE THOSE COMPANIES WHO ACT RESPONSIBLY AND ARE PERCEIVED TO ACT RESPONSIBLY. ---CEO NON US M ULTINATIONAL FMCG 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

15. “A SOCIALLY RESPONSIBLE COMPANY STRIVES TO MEET A STANDARD THAT ’ S HIGHER THAN THE BOTTOM LINE, W E MUST REMEMBER THAT CORPORATIONS EXIST BECAUSE SOCIETY SAYS THEY CAN — AND SOCIETY ASSUMES THAT WE ’ LL CONTRIBUTE TO THE COMMON GOOD. T HAT ’ S THE BARGAIN WE STRIKE. T HE SOCIAL COMPACT.” ---CEO FINANCIAL SERVICES COMPANY 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

16. “ WE OPERATE IN A VERY COMPETITIVE ENVIRONMENT AND THE PRESSURE TO PRODUCE IS INTENSE, BUT THE CONSISTENT MESSAGE TO MANAGERS AND SALES REPRESENTATIVES IS TO PRODUCE IN AN ETHICAL MANNER — FOLLOW ALL THE RULES AND LISTEN TO THE CUSTOMER. E THICAL TRADE - OFFS CAN APPEAR TO HAVE SHORT - TERM ADVANTAGES, BUT THEY USUALLY DON ’ T, AND THEY CERTAINLY DON ’ T IN THE LONG RUN.” ---CEO T ECHNOLOGY COMPANY 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

17. “I N TODAY ’ S WORLD, THE RULES HAVE CHANGED AND WE ALL HAVE TO ADAPT TO THAT.” ---CEO M AJOR R ETAILER 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

18. W E PUBLICIZE OUR ETHICS VIOLATIONS, EVEN WHEN OUR LAWYERS TELL ME WE SHOULDN ’ T. P EOPLE HAVE TO KNOW WE ’ RE SERIOUS ABOUT THESE ISSUES. ---CEO C HEMICAL I NDUSTRY 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

19. W E HAVE TO PAY ATTENTION TO THESE THINGS. O UR RECRUITS ARE ASKING LOTS OF QUESTIONS. P LUS … WHOSE STANDARDS ARE RELEVANT TO US. W E ’ RE A GLOBAL COMPANY. ---CEO I NDUSTRIAL P RODUCTS 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

20. Y OU GET FIRED FOR MISSING ON INTEGRITY NOT FOR MISSING NUMBERS. H OW DOES THAT HELP US FIGURE OUT WHAT TO DO ALL OVER THE WORLD ? ---CEO I NDUSTRIAL P RODUCTS 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

21. I T ’ S TOUGH TO BE TOLD EVERY DAY THAT YOU ’ RE BEING STUPID. A CCOUNTANTS, CONSULTANTS, AND LAWYERS ARE FIGURING OUT WAYS FOR YOU TO DO STUFF THAT YOU REALLY DON ’ T UNDERSTAND. Y OU HAVE TO ASK YOURSELF SOME PRETTY BASIC QUESTIONS TO CUT THROUGH THAT STUFF. ---P OWER I NDUSTRY CEO 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

22. I’ M PRETTY SURE THAT THIS MEETING WITH A DISGRUNTLED EMPLOYEE LEADS NOWHERE. H E ’ 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. ---F INANCIAL S ERVICES CEO 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

23. W E JUST DIDN ’ T SEE HOW LENDING OUR CUSTOMERS MONEY THAT THEY REALLY COULDN ’ T AFFORD TO PAY BACK WAS A GOOD IDEA. S O, WE REALLY DIDN ’ T GET CAUGHT VERY MUCH IN THIS SUBPRIME THING. ---CEO OF A BANK 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

24. P EOPLE DON ’ T HAVE TO DIE FROM AIDS. W HAT ’ S HAPPENING WITH HIV IN A FRICA IS A MORAL OUTRAGE …T HERE IS ABSOLUTELY NO LEADERSHIP IN THE PHARMACEUTICAL INDUSTRY. ---F ORMER P HARMACEUTICAL CEO 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

25. I THINK WE ’ RE PRETTY GOOD AT THIS STUFF. B UT, 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. ---C ONGLOMERATE CEO 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

26. I HAVE TO PAY MORE ATTENTION TO THE PROCESS BY WHICH WE HIRE PEOPLE. O UR BRAND IS AT RISK WITH EVERYONE WE HIRE. ---T ELECOM CEO 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

27. W HEN YOU ACTUALLY GO TO C OUNTRY X AND YOU SEE THE CONDITIONS THAT PEOPLE LIVE IN, WE OWE THEM THE CHANCE TO DEVELOP THEMSELVES AND THEIR RESOURCES. B UT, WE CAN ’ T DO IT IN A WAY THAT IS NOT SUSTAINABLE. ---E UROPEAN A GRIBUSINESS E XECUTIVE 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

28. S USTAINABILITY IS TODAY WHAT QUALITY WAS TO THE 1980 S. W E THOUGHT THAT QUALITY HAD A COST ATTACHED TO IT AND FOUND OUT IT WAS PROFITABLE. I T IS SIMPLY A WAY OF BEING. ---I TALIAN E XECUTIVE, P ACKAGING I NDUSTRY 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

29. W E ’ RE TRYING TO FIX THE FACTORIES, EVEN THOUGH THEY BELONG TO OUR SUPPLIERS. N OW WE ARE GETTING PRESSURE TO FIX CHILD LABOR IN THE FLOWER FIELDS. T HE DYE THAT GOES INTO OUR PRODUCTS COMES FROM THESE FLOWER FIELDS. I’ M HAVING ENOUGH TROUBLE WITH THE FACTORIES. W HAT DO I DO ABOUT THE FLOWER FIELDS ? ---N IKE E XECUTIVE 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

30. Y OU 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. ---C HEMICAL I NDUSTRY CEO 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

31. T ODAY ’ S YOUNG EMPLOYEES WANT TO FEEL GOOD ABOUT THE COMPANIES THEY WORK FOR. S USTAINABILITY, SOCIAL RESPONSIBILITY, AND ETHICS ARE NOT “ NICE TO DO ”. I F YOU WANT THE BEST TALENT THEY ARE BUSINESS IMPERATIVES. ---US F OOD I NDUSTRY E XECUTIVE 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

32. I N THE WORDS OF ONE CEO, HOW DO I MAKE DECISIONS WHEN I DON ’ T EVEN KNOW HOW TO THINK ABOUT THIS ISSUE ? T HINK ABOUT THESE CASES … 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

33. HIV IN A FRICA AND THE US B ANK 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 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

34. T HE B USINESS M ODEL D ILEMMA 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. How should Company A compete? 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

35. I N THE N EWS 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. How should the executives at Company X think about this issue? 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

36. T HE D EVELOPMENT P ROGRAM 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. How should they think about this challenge? 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

37. A S IMPLE I DEA Business 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 (c) 2008 R. Edward Freeman. All rights reserved.

38. T HE M ANAGING FOR S TAKEHOLDERS M INDSET : T EN P RINCIPLES 1. Stakeholder interests go together over time. 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

39. T HE M ANAGING FOR S TAKEHOLDERS M INDSET : T EN P RINCIPLES 4. Everything that we do serves stakeholders. We never trade off the interests of one versus the other continuously over time. 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

40. T HE M ANAGING FOR S TAKEHOLDERS M INDSET : T EN P RINCIPLES 7. Stakeholders consist of real people with names and faces and children. They are complex. 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. 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

41. Enterprise Strategy Stakeholders and Principles Societal Context And Responsibility Purpose and Values Ethical Leadership The Basic Value Proposition Principles for Sustained Stakeholder Cooperation Understanding the Broader Societal Principles of Ethical Leadership 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

42. E NTERPRISE S TRATEGY Stakeholders and Principles Societal Context And Responsibility Purpose and andValues Ethical Leadership 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? 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

43. Enterprise Strategy StakeholdersandPrinciples Societal Context And Responsibility Purpose and Values 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? Questions: What are the major tradeoffs that we make in managing our stakeholder relationships? What are we doing to improve these tradeoffs? Ethical Leadership 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.

44. Enterprise Strategy Stakeholders and Principles Societal Context AndResponsibility Purpose and Values Ethical Leadership Societal Trends Critics Governance Stakeholder Dialogue and Engagement 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 (c) 2008 R. Edward Freeman. All rights reserved.

45. “ S ERVING ALL YOUR STAKEHOLDERS IS THE BEST WAY TO PRODUCE LONG TERM RESULTS AND CREATE A GROWING, PROSPEROUS COMPANY …L ET ME BE VERY CLEAR ABOUT THIS : THERE IS NO CONFLICT BETWEEN SERVING ALL YOUR STAKEHOLDERS AND PROVIDING EXCELLENT RETURNS FOR SHAREHOLDERS. I N THE LONG TERM IT IS IMPOSSIBLE TO HAVE ONE WITHOUT THE OTHER. H OWEVER, SERVING ALL THESE STAKEHOLDER GROUPS REQUIRES DISCIPLINE, VISION, AND COMMITTED LEADERSHIP.” -- B ILL G EORGE, FORMER CEO M EDTRONIC 5/28/2008 (c) 2008 R. Edward Freeman. All rights reserved.